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.
1 Nominal value of Senior Facilities and EMTN as of 31 December 2010
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.
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.
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):
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:
|Monitored interest-rate risk variables (end-of-period)||DKKm|
|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
|Duration of gross
|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%|
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):
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:
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
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.
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
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.
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:
TDC has no significant shareholdings other than shares held in its subsidiaries and associates.
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.
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 lines||DKKm|
|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|