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Notes to the consolidated financial
statements, REC Group
REC Annual Report 2011
(D) Interest rate risk
Changes in market interest rates affect the fair value of assets and
liabilities or the variability in cash payments. The REC Group is
exposed to interest rate risk through funding and cash management
activities, primarily in REC ASA. Cash in bank accounts and bank
borrowings have historically primarily carried variable interest
rates, while bonds to a large extent are fixed rate. REC has
borrowings through drawdown on credit facilities, bonds,
convertible bond and finance leases.
Borrowings through REC ASA are primarily exposed to changes
in USD, EUR and NOK interest rates. REC ASA has entered into
interest rate derivatives, both to swap variable interest to fixed and
to swap fixed rate exposure to variable interest rates (see note 11).
Interest hedging instruments have been used to control the debt’s
exposure towards interest rate fluctuations within the framework
defined in the finance policy. The debt’s price sensitivity towards
fluctuations or volatility in interest rates ismeasured bymodified
duration. Market interest rate volatility affects the pricing of the net
debt and is also impacting the Group’s net interest costs. Interest
rate fluctuations affect the pricing of the debt instruments less when
themodified duration is low. Themodified duration expresses the
price effect of a one percent change in interest ratesmeasured by
years. The net debt of RECGroup shall not have amodified duration
exceeding 3 years. Normally, themodified duration for RECGroup
should be between 0.5 - 2.0 years. At December, 31 2011 the
modified duration was 1.6 years (excluding finance lease debt).
Interest income and interest expense in the statement of income, as
well as interest receipts andpayments, are influencedby interest rate
changes for financial instruments that carry variable interest rates. Fair
values of fixed rate instruments and interest derivatives are affected
by interest rate changes. See note30 for interest rate sensitivity.
(E) Hedging of risk related to supply of rawmaterial/commodities
According to the finance policy, REC subsidiaries that have a high
portion of total costs from a specific input factor may hedge the
risk of significant negative movements in prices. The extent of a
significant negative movement is evaluated in each case
considering the effect of price increases and price volatility for the
relevant input factor on the operating results for the subsidiary.
Price risk for the input factor should be hedged primarily through
long-term contracts. Financial instruments may also be used for
hedging significant changes in the price of important input factors.
As of year-end 2011 and 2010, no such hedges have been
conducted, except entering into some energy purchase contracts.
3.2 FAIR VALUE ESTIMATION
Fair value estimation is discussed in note 30.
3.3 CAPITAL STRUCTURE AND FINANCING
REC aims to have a profitable growth and shall seek to maintain
a sustainable capital structure and maintain access to various
sources of funding. The main reason for this is the high industry
volatility and operational risks which could significantly impact
EBITDA and cash flow from operations and REC’s financial key
ratios and borrowing terms going forward.
In determining the appropriate capital structure for the REC Group,
various factors have been considered. These include risks
associated with the REC Group’s business profile, the fact that the
PV industry has high capital intensity and the expected unfavorable
impact on the demand for REC Group’s products and higher cost of
capital from increased interest rates. Also, PV is a relatively new
business with limited history and is still dependent on governmental
incentives in various countries.
REC shall maintain access to various sources of funding. Due to the
dynamic nature of the underlying businesses, REC aims tomaintain a
high degree of financial flexibility by keeping sufficient cash and cash
equivalents or committed credit facilities available. REC shall at all
times strive to have sufficient equity capital to implement the
business strategies and have financial flexibility in relation to possible
new investments. Taking into account themarket volatility and the risk
related to future cash flows, REC shall aimtomaintain a long term
capital structure corresponding to an “Investment Grade” rating.
See the consolidated statement of changes in equity for the equity of
theRECGroup and note 17 for RECGroup’s interest bearing liabilities.
The significant loss for the year has reduced equity considerably
at December 31, 2011 compared to the previous year. Equity
amounted toNOK12.2billion at December 31, 2011, compared to
NOK22.2billion at the end of 2010. The equity ratio (calculated on
book values) was approximately 50percent at December 31, 2011
compared to approximately 60percent at December 31, 2010. REC’s
targets for equity capital is reflected in the discussion above relating
to the finance policy, and the bank loan agreement has aminimum
equity ratio requirement (andwith a different definition fromthe
calculations referred to above), see below. At December 31, 2011
REC had unused revolving credit facility of NOK6.5billion. The net
debt of theRECGroup (calculated on book values) wasNOK4.7billion
at December 31, 2011, a decrease of NOK3.2billion fromthe end of
2010. Net debt includes bank debt, senior domestic bonds partially at
fair value, the convertible bond at fair value andfinance leases,
reduced by bank deposits. Due to theRECGroup’s own credit, the fair
values of REC’s interest bearing liabilities are below the notional
amounts and the amounts that shall be repaid atmaturity (see note
30). The equity and net debt definitions for the covenant calculations
differ in some aspects fromthe calculations above, especially because
the EUR convertible bond is regarded as equity for the covenant
calculations, and exclusion of some finance lease liabilities.
REC ASA’s bank debt facilities have borrowing limits defined in
NOK even if the majority of this debt both will be drawn and
serviced by other currencies (e.g. EUR and USD). The NOK exchange
rate affects the amounts available under the multi-currency credit
facilities with limits determined in NOK as RECmainly will borrow in
USD and EUR. Starting at the end of the first quarter 2012, the
total amounts available in the revolving bank credit facilities will be
reduced by NOK 350million quarterly. The residual principal
amount shall be repaid in the beginning of June 2013.
According to REC’s finance policy, REC shall at all times maintain
financial ratios within the limits defined in the loan agreements of
REC ASA and subsidiaries, and take the necessary measures that
are available to avoid financial distress. Neither the senior NOK