Risk management

Risk management

Operational risk management

TDC has a central Risk Management function and a Corporate Security function, which handle operational risk management in TDC. Additionally, each subsidiary has appointed employees responsible for security and insurance issues who work closely together with the central Risk Management function. The risk management activities are governed largely by a corporate insurance policy, which is anchored in the corporate security policy.

The aim of the Corporate Security and Risk Management functions is systematically to identify and reduce risks relating to TDC's assets, activities, and employees. It is TDC's policy to continuously reduce risks in general, and to transfer disaster risks to insurance companies.

As part of the risk management strategy, a comprehensive annual risk survey programme is employed in close cooperation with external risk engineers. Insurance coverage is based on identified risk scenarios and insurance conditions available from insurance markets in Denmark and abroad.

The amount of self retention in TDC's insurance programs has been determined based on the risk assessment related to each individual area and the subsequent level of insurance premiums.

Maturity-profile-UK.png
1 Nominal value of Senior Facilities and EMTN as of 31 December 2010

Financial management and market risk disclosures

TDC is exposed to financial market and credit risks when buying and selling goods and services in foreign denominated currencies as well as due to its investing and financing activities. As a consequence of TDC's capital structure and financing, TDC faces interest and exchange-rate risks. Furthermore, the Senior Facilities Agreement includes several financial covenants and undertakings related to selected financial ratios to which TDC must adhere. TDC's Group Treasury identifies, monitors and manages these risks through policies and procedures approved by the Board of Directors. Maximum risk levels have been set for interest, exchange-rate and credit exposures. Together with market values of financial assets and liabilities, these exposures are calculated and monitored daily (credit risks) or twice weekly (interest and exchange-rate risks). All risk measures are reported to the Group Chief Financial Officer on a weekly basis.

Group Treasury is responsible for the treasury management system and methodologies used to calculate and estimate risk positions. Further, TDC's independent accountants review Group Treasury's procedures and methodologies on a regular basis to ensure compliance with regulations and internal guidelines and procedures. Group Treasury uses derivatives for hedging interest and exchange-rate exposure. The derivatives are used for hedging purposes only and not for taking speculative positions.

The general policies and procedures for TDC's financial risk management are set out in the financial strategy, which is reviewed and revised on an annual basis, if necessary. The financial strategy is approved by TDC's Board of Directors.

TDC's financial strategy was approved in December 2008 and defines maxima for interest and exchange-rate value at risk (VaR) as well as maxima/minima for a range of other risk variables. However, in December 2010, the Board of Directors approved a new financial strategy with maxima/minima supporting TDC's new financial policy targets.

Refinancing and liquidity risk

To reduce refinancing risk, the maturity profile of the debt portfolio is spread over several years. Further, voluntary prepayments and buy-backs of debt have reduced debt redemption hurdles. Therefore, TDC has no significant debt positions that are required to be refinanced in the near future. The committed Revolving Credit Facility of up to EUR 700m (or DKK 5,200m) and cash generated by the business activities are deemed sufficient to handle upcoming redemption of debt.

TDC continuously monitors the international capital markets and expects to refinance the Senior Facilities Agreement in early 2011 provided terms and conditions are deemed favourable.

Interest-rate risks

TDC is exposed mainly to interest-rate risks in the euro area, as the vast majority of the net interest-bearing debt is denominated or swapped into EUR. The interest-rate risk emerges from fluctuations in market interest rates, which affect the market value of financial instruments and financial income and expenses.

Throughout 2010, TDC monitored and managed its interest-rate risks using several variables in accordance with TDC's financial strategy. These variables protect primarily TDC's retained earnings, financial covenants and undertakings, which TDC must adhere to according to the Senior Facilities Agreement. The following variables are monitored (for TDC and NTCH ApS in combination):

  • Interest-rate value at risk ('VaR') on gross debt (including related derivatives) should not exceed DKK 2,500m
  • Interest-rate VaR on the derivatives portfolio and marketable securities should not exceed DKK 1,000m
  • Floating interest-rate debt should not exceed 60% of the total gross debt (including related derivatives)
  • Duration of gross debt (including related derivatives) should exceed one and a half years
  • Duration of cash accounts, marketable securities and deposits should not exceed half a year
  • The maximum share of fixed-rate gross debt to be reset within one year should not exceed 25% for the next five years (the Chief Financial Officer can approve breaches of the 25% limit for up to three months during which Group Treasury must take action or have plans approved by the Chief Financial Officer to reduce the interest resetting risk to below 25%).

The table below shows the interest-rate risk variables monitored by TDC.

Going forward, TDC will monitor and manage the interest-rate risk in accordance with TDC's financial strategy for 2011 to protect TDC's financial policy targets. Therefore, the following variables have been monitored as of January 2011:

  • Floating interest-rate debt shall not exceed 60% of the total gross debt (including related derivatives)
  • The maximum share of TDC's fixed-rate debt (including related derivatives) to be reset within one year shall not exceed 25% in year two, 30% in year three and 35% in year four, respectively
  • Duration of TDC's gross debt (including related derivatives) shall exceed 1.75 years but shall not exceed 3.75 years [1]
  • Duration of TDC's financial assets (cash accounts, marketable securities and deposits) shall not exceed 0.25 years

Monitored interest-rate risk variables (end-of-period)DKKm
Maxima/
minima
Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Interval 2010 Average 2010 Average 2009 Average 2008
Interest-rate VaR on gross debt Max. 2,500 920 1,096 1,141 1,211 586 586-1,288 1,114 861 1,067
Interest-rate VaR on the derivatives portfolio and marketable securities Max. 1,000 272 441 529 630 423 236-662 517 300 417
Share of floating
interest-rate debt
Max. 60% 43% 40% 35% 30% 24% 20%-43% 34% 43% 38%
Duration of gross
debt (years)
Min. 1.5 1.81 2.26 2.39 2.58 2.18 1.79-3.11 2.44 1.91 2.24
Duration of cash accounts, marketable securities and deposits (years) Max. 0.5 0.00 0.00 0.00 0.00 0.00 0.00-0.03 0.00 0.01 0.01
The maximum share of fixed interest-rate gross debt to be reset within one year for the next 5 years Max. 25% 25% 25% 20% 15% 32% 15%-32% 21% 28% 18%

Exchange-rate risks

TDC is exposed primarily to exchange-rate risks from EUR, SEK and NOK. The exchange-rate exposure from TDC's business activities relates principally to profits for the year generated in foreign subsidiaries, as income and expenses generated in these entities are denominated in primarily local currencies. As the exposure is relatively insignificant, to date it has not been hedged.

For Danish companies, the net exchange-rate exposure arising from accounts payable and receivable has, as a guiding rule, been hedged on the date on which it is recognised. Such exposure arises mainly from roaming and interconnection agreements with foreign operators and equipment suppliers.

Due to TDC's capital structure, the exposure from financial activities in EUR is significant, as 97% of the nominal gross debt (including derivatives) is denominated in EUR. However, due to the fixed EUR/DKK exchange-rate policy of Danmarks Nationalbank (the Danish central bank), TDC does not consider its positions in EUR to constitute a significant risk.

TDC has not hedged its investments in foreign entities.

Throughout 2010, TDC monitored and managed exchange-rate risk using several variables in accordance with TDC's financial strategy. These variables primarily protect retained earnings, financial covenants and undertakings to which TDC must adhere according to the Senior Facilities Agreement. The following variables are monitored (for TDC):

  • Exchange-rate VaR on equity investments and intra-group loans (both including related hedging instruments) shall not exceed DKK 2,000m
  • Exchange-rate VaR on gross debt, hedging instruments (other than those used for equity investments and intra-group loans), loans to associates, cash accounts, marketable securities and accounts payable & receivable shall not exceed DKK 500m

The table below shows the exchange-rate variables monitored by TDC.

In addition to the above variables, the financial strategy includes a range of exchange-rate hedging policies that e.g. stipulate that as a guiding rule, investments in non-core businesses should be hedged, investments in core businesses should not be hedged, and all Group accounts payable and receivable should be hedged against local currencies. Further, exchange-rate VaR on EBITDA or Consolidated Cash Flow (as defined in the Senior Facilities Agreement) shall not exceed 3% of EBITDA or Consolidated Cash Flow.

Going forward, TDC will monitor and manage the exchange-rate rate risk in accordance with TDC's financial strategy for 2011 to protect TDC's financial policy targets. Therefore the following variables have been monitored as of January 2011:

  • Total open gross position (including accounts payable & receivable, cash accounts, financing (including derivatives) and marketable securities) in other currencies than DKK and EUR shall not exceed DKK 750m
  • EFCF in other currencies than EUR and DKK in the coming year shall be hedged if foreign currencies constitute a risk to EFCF of more than 1.25% of total EFCF

In addition to the above variables, the new financial strategy includes a range of exchange-rate hedging policies that e.g. stipulate that, as a guiding rule, EUR positions of TDC companies with local currencies in DKK or EUR are not to be hedged and that currency holdings in foreign subsidiaries in other currencies than DKK and EUR to the largest extent possible are paid out as dividend to TDC A/S subject to maintaining an appropriate capitalisation and liquidity position of the subsidiary.

Further, as a guiding rule, TDC does not hedge exchange-rate exposure arising from foreign investments in the Nordic countries as these are regarded as long-term investments.

Monitored exchange-rate risk variables (end-of-period)DKKm
Maxima Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Interval 2010 verage 2010 Average 2009 Average 2008
Exchange-rate VaR on equity investments and intra-group loans1 1,238 626 858 514 307 290-1,266 768 890 577
Exchange-rate VaR on the financial
portfolio1,2,3
125 119 87 86 65 49-126 108 113 134
  1. The reduced exchange rate-VaR on equity investments and intra-group loans and exchange-rate VaR on the financial portfolio in Q4 2010 compared with the preceding quarters is caused by the divestment of Sunrise during this quarter and the resulting reduced exchange-rate exposure
  2. Gross debt, other hedging instruments, loans to associates, cash accounts, marketable securities and accounts payable and receivable.
  3. The average figures for 2008 cannot be compared with the figures for 2009 and 2010. Before 2009, the portfolio was divided between a EUR denominated portfolio and non-EUR denominated portfolio. Thus, the 2008 average figures are the sum of these two portfolios with no correlation effects taken into account.

Credit risks

TDC is exposed to credit risks principally as a supplier of telecommunications services in Denmark and abroad, and as a counterparty in financial contracts. The credit risk arising from supplying telecommunications services is handled by the individual business lines, whereas the credit risk in relation to financial contracts is handled centrally by Group Treasury. Credit risk arising in relation to financial contracts is governed by the financial strategy that defines a maximum exposure for each counterparty. The maxima are based primarily on the lowest credit ratings of the counterparties from either Standard & Poor's (S&P) or Moody's Investor Services (Moody's). This policy acts to diversify counterparty exposure and reduce exposure to single counterparties. However, should one of TDC's counterparties default, TDC might incur a loss. Credit risk is monitored on a daily basis.

Credit rating

TDC has adopted a leverage and rating policy under which TDC aims to achieve a net debt-to-EBITDA ratio at or below 2.1x and to seek to obtain and maintain a stable investment grade rating, with the ambition of maintaining a rating of BBB with S&P and Baa2 with Moody's. No assurance can be given that the aims of such a policy will be achieved at all times.

TDC is rated by three international rating agencies - S&P's, Moody's and Fitch Ratings.

TDC's Company Ratings

Rating Short-term Long-term Outlook
S&P A-2 BBB Stable
Moody’s P2 Baa2 Stable
Fitch F3 BBB Stable

During 2010, both TDC's outlook and company rating were upgraded.

On 14 June 2010, S&P upgraded TDC's company rating to BB (positive outlook) from BB - (positive outlook). Further, the credit rating of TDC's Senior Facilities was upgraded to BBB- from BB+ and the credit rating of TDC's Euro Medium Term Notes (EMTNs) was upgraded to BB from BB-.

On 15 December 2010 S&P upgraded TDC's company rating to BBB (stable outlook) from BB (positive outlook). Further, the credit rating of TDC's Senior Facilities was upgraded to BBB from BBB- and the credit rating of TDC's Euro Medium Term Notes (EMTNs) was upgraded to BBB- from BB.

On 20 September 2010, Moody's placed all ratings of TDC A/S under review for possible upgrade, following TDC's announcement of an agreement to sell its Swiss subsidiary Sunrise to CVC Capital Partners. The review for upgrade affected TDC's Ba2 company rating as well as the Ba1 credit rating for TDC's Senior Facilities and the Ba3 credit rating for TDC's Euro Medium Term Notes (EMTN).

On 20 January 2011, Moody's upgraded TDC's long-term issuer rating to Baa2 from a corporate family rating of Ba2, and its short-term rating to Prime-2 from Not Prime. The Outlook is stable. The credit rating of TDC's senior secured debt facilities was upgraded to Baa2 from Ba1. At the same time, the credit rating of TDC's EMTN notes was upgraded to Baa2 from Ba3.

On 14 December 2010, Fitch upgraded TDC's company rating to BBB (stable outlook) from BB (positive). At the same time, the credit rating of TDC's Senior Facilities was upgraded to BBB+ from BB+ and the credit rating of TDC's Euro Medium Term Notes (EMTN) was upgraded to BBB from BB.

Shares

TDC has issued 991,875,885 shares as of year-end 2010 of which 175,117,518 were held as treasury shares.

TDC expects to reduce the share capital by cancelling 166,875,885 shares. Following such a capital reduction, the number of issued shares would amount to 825,000,000 and the number of treasury shares would amount to 8,241,633. The expected capital reduction is subject to approval by the Annual General Meeting.

The remaining treasury shares may be used for the following purposes:

  • in connection with incentive and other remuneration programmes for the TDC's executive management and employees
  • as consideration for acquisitions of other businesses.

TDC has no significant shareholdings other than shares held in its subsidiaries and associates.

TDC's related pension funds

The pension funds related to TDC invest in a wide variety of marketable securities (predominantly fixed income and equities) and property. The rate of return on the investments has implications for TDC's financial results and pension-plan funding requirements, as TDC is obliged to cover any shortfall in the pension funds' ability to comply with the capital adequacy requirements under the Danish Act on Company Pension Funds.

TDC continuously monitors the pension fund investments and the related risks.

The Danish Financial Supervisory Authority (Finanstilsynet) has introduced a mortality benchmark for members of company pension funds, which will be implemented at 1 January 2011. The Financial Supervisory Authority now also requires that TDC Pensionskasse analyses whether the mortality of the members of the pension fund deviates from the benchmark and submits a report on this matter to the Authority on 1 July 2011 at the latest. Deviation from FSA's benchmark shall be allowed only if the pension fund can provide adequate documentation that there is a significant and justifiable reason for the difference in mortality between that of the pension fund and the benchmark. In TDC Pensionskasse's opinion, the mortality of the members of the pension fund deviates from that of the FSA benchmark in Denmark. If the FSA disagrees, and the pension fund has to apply the benchmark, it will result in higher pension provisions in TDC Pensionskasse and will possibly require the injection of funds by TDC to comply with the statutory solvency requirements.

Financial position

At year-end 2010, cash and interest-bearing receivables amounted to DKK 1,039m compared with DKK 937m at year-end 2009, while short-term interest-bearing debt and interest-bearing payables amounted to DKK 218m at year-end 2010, leaving net liquid assets at DKK 821m. The corresponding short-term interest-bearing debt and net liquid assets for year-end 2009 were DKK 3,787m and DKK (2,850)m, respectively.

Long-term interest-bearing debt totalled DKK 23,428m at year-end 2010 compared with DKK 30,611m at year-end 2009. Net interest-bearing debt was DKK 22,607m at year-end 2010, a decrease of DKK 10,854m compared with year-end 2009.

TDC's total cash, marketable securities, net interest-bearing receivables and undrawn credit lines totalled DKK 5,940m at year-end 2010, an increase of DKK 1,679m compared with year-end 2009.

Net interest-bearing debt was DKK 33,461m at year-end 2009, a decrease of DKK 1,412m compared with year-end 2008. TDC's total cash, marketable securities, net interest-bearing receivables and undrawn credit lines totalled DKK 4,261m at year-end 2009, a decrease of DKK 7,332m compared with year-end 2008.

In TDC's opinion, the available cash, marketable securities, interest-bearing receivables and undrawn credit lines are sufficient to maintain current operations, to complete projects underway, to finance stated objectives and plans, and to meet short- and long-term cash requirements.

Year-end net interest-bearing debt and total cash, interest-bearing receivables and undrawn credit linesDKKm
TDC Group 2010 2009 2008
Cash and interest-bearing receivables 1,039 937 6,877
Short-term interest-bearing debt and interest-bearing payables (218) (3,787) (4,713)
Net liquid assets 821 (2,850) 2,164
Long-term interest-bearing debt (23,428) (30,611) (37,037)
Net interest-bearing debt (22,607) (33,461) (34,873)
Cash and interest-bearing receivables 1,039 937 6,877
Undrawn committed short- and long-term credit lines 4,901 3,324 4,716
Total cash, net interest-bearing receivables and undrawn credit lines 5,940 4,261 11,593

  1. Group Treasury is currently in the process of replacing its treasury management system (to be implemented during 2011). When the new treasury management system has been implemented, BPV (Basis Point Value) is to replace duration as the interest-risk measurement. A minimum duration of 1.75 years is equivalent to a minimum BPV of DKK 2.2m. A maximum duration of 3.75 years is equivalent to a maximum BPV of DKK 9.7m.
Til top

Add page to

You can add pages or sections to your own TDC report.

Go to your Personal report page to add or remove pages, and download your report