Asset Buyout Partners Annual Report 2020

Note 3 Financial Risk Management General objectives, policies and processes The Group’s principal liabilities, other than derivatives are loans and borrowings. The main purpose of the Group’s loans and borrowings is to finance the acquisition and development of the Group’s real estate portfolio. The Group has rent and other receivables, trade and other payables, cash and cash equivalents that arise directly from its operations. The Group is exposed to different risk factors, including; market risk, interest rate risk, credit risk and liquidity risk. The risk policies are continuously being assessed by the Board of Directors and the appropriate policies and procedures to identify, measure and manage the financial risks has been implemented. The Group’s overall risk management strategy is targeted to protect the value of ABPs investments. Market risk ABP is exposed to changes in market rents, occupancy in the portfolio and the rate of inflation. Negative development will impact the property portfolio fair value and loan to value ratio. Due to the Covid-19 virus spread the market volatility increased in 2020. In addition to the Covid-19 outbreak, there has been considerable volatility in the oil price. The financial impact due to Covid-19 on ABP’s assets and liabilities is assessed as not material. As ABP mainly has long-term lease contracts with fixed revenues over their term the risk is assessed to be minimized in short-term. The Group has all its operations in Norway; thus all lease agreements, financing and expenses are in NOK, consequently there is no foreign exchange risk. Interest rate risk The Group’s interest rate risk arises in both the short and medium-­ term perspective as a share of The Group’s borrowings are held at floating interest rates. Changes in the interest rate level will have a direct impact on future cash flows and can also affect future investment opportunities. To manage the interest rate risk, the Group enters into interest rate swaps in which it agrees to exchange at specified intervals, the difference between fixed and variable rates. Interest rate swaps are only used for economic hedging purposes and not as speculative investments. The Group has not applied hedge accounting, and changes in fair value of the derivative contracts are accounted for as fair value through profit or loss. They are presented as current assets or liabilities to the extent they are expected to be settled within 12 months after the end of the reporting period. The decline in interest rates during 2020 has had a negative impact on the market values of ABPs derivative financial instruments. However, the decrease in long-term interest rates counteract some of these effects, by way of lowering yields and increasing real estate values. A 1% increase in floating interest rate, assuming 65% of the loans swapped to fixed rate, will result in increased interest costs over the next twelve months of NOK 15 million. Information about nominal value of swaps as a share of total debt is set out in note 12. Credit risk Credit risk is the risk of loss when a party is unable to pay their obligations to the Group. The risk is mainly related to operating cashflow from rent and the value of investment property, in the event that the tenant is unable to service its rent obligation. For total credit exposure see note 9 and note 10. The credit quality of a tenant is assessed based on an extensive and thorough evaluation of the tenant when new lease agreements are entered and as part of the assessments made when acquiring new property with existing lease agreements. Further, credit risk is managed by requiring tenants to pay rentals in advance and by performing regular monitoring of credit quality of the significant tenants. Due to Covid-19 market uncertainty has increased, which may increase the risk that some tenants may default and thus creating a loss for ABP. Most of the tenants are large oil and gas and oil service companies and the credit risk is at an acceptable level. Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its obligations at maturity, and the risk that the Group will not be able to meet its obligations without a significant increase in cost. The Group’s objective is to maintain a reasonable balance between debt and equity, and to have sufficient available cash to fulfil obligations from the Group’s activity. Management monitors rolling forecasts of the group’s liquidity reserve and cash and cash equivalents on the basis of expected cash flows. Currently the liquidity risk is at an satisfactory level. Asset Buyout Partners | Annual Report 2020 25