Risks and Risk Management
SRV engages in systematic risk management in order to protect itself against factors that might adversely affect its business operations and to promote recognition of new opportunities. The company improves the profitability and stability of its operations by identifying strategic and operational risks and reacting to them in a timely manner. Risk management is part of SRV’s management system. It supports the company’s values, vision, strategy and the achievement of its earnings objectives.
The objective of risk management is to ensure that SRV’s controllable risks do not jeopardise operations. To this end, SRV has a systematic and comprehensive approach to identifying and assessing risks as well as to carrying out the necessary risk management measures and reporting on operations.
Overall responsibility for risk management rests with the company’s Board of Directors and the President & CEO. The Audit Committee goes quarterly through a report on the operational risks and how to prepare for them. The Board of Directors approves the risk management strategy and policy, and assesses the framework for risk management covering the entire company. Line management is in charge of carrying out day-to-day risk management as well as for its steering and supervision. The Group’s risk management function supports the application of risk management principles and develops Group-wide operating practices.
Risks and uncertainties (Interim report 1-3/2022)
SRV’s most significant risks and uncertainties concern negative changes in the company’s and its customers’ operating environment, capital employed in major projects, the availability of financing for SRV and its projects, the rise in construction costs and SRV’s earnings trend, the coronavirus pandemic, key project implementation risks, and currently especially the consequences of Russia’s war against Ukraine.
Many of the risk positions involved in the construction industry have increased significantly due to the war. Although the general economy has been recovering from the economic consequences of the coronavirus pandemic in Finland as well, uncertainty about the outlook for the future has grown substantially due to the war. Many forecasting institutions have downgraded their estimates for near-term economic growth that they issued at the beginning of the year. Economic uncertainty might be negatively reflected in the confidence of both companies and consumers, and thereby also on construction and housing sales. This risk is increased by accelerating inflation and the now rising interest rates. Furthermore, the availability of certain raw and construction materials and energy in particular may be hampered by the sanctions imposed by western countries and Russia, thereby further increasing construction costs. Cyberattacks and hacking of telecommunications and IT systems might increase, causing disruptions in the operations of SRV and its customers and partners.
Russia’s war in Ukraine also contributes to the tightening economic situation in Russia. The prices of imported goods in particular have risen fast and the purchasing power of consumers is weakening. In addition, many foreign players are exiting the country, which significantly hinders the operations of the shopping centres partly owned by SRV. That said, SRV’s balance sheet assets in Russia have been almost fully written down, which has eliminated risks posed by their balance sheet value and changes in the rouble exchange rate.
On 4 February 2022, SRV announced that it will exit its holding in Fennovoima and sell it to RAOS Voima Oy. In the company’s view, it is unlikely that this contractual arrangement will come into force in the prevailing political atmosphere, as it is subject to approval by the Ministry of Economic Affairs and Employment. In addition, the risk that the project will be interrupted has grown significantly. The company has written down its holding in Fennovoima.
SRV has initiated a set of measures in order to comprehensively restructure the company’s financing due to the impairment of Russian business functions following Russia’s invasion of Ukraine and the related economic sanctions. The weakening of asset values has a major impact on SRV’s shareholders’ equity and equity ratio. The equity ratio calculated as per the covenants of financing agreements was 12.3 per cent, as the covenant calculation took into account the recognition of income from developer-contracted projects on the basis of percentage of completion.
Due to these impairments, two outstanding bonds with a total principal of about EUR 100 million no longer fulfil their equity ratio covenants. In addition, the equity ratio and gearing covenants of the company’s revolving credit facility and project financing facility are no longer met. Being unable to meet the covenant provisions triggers the termination and call-in right thus the bonds are reclassified as short-term interest-bearing liability. The company and the lenders of its revolving credit facility and project financing facility have agreed on a standstill period lasting until 30 June 2022 during which the lenders have waived their rights to demand early repayment and termination as a result of the write-downs of assets in Russia, subject to the continuation of said restructuring of financing. SRV has initiated a set of measures in order to comprehensively restructure the company’s financing. Success of the financial restructuring has not been confirmed at the end of the reporting period, thus there is material uncertainty related to going concern. On the basis of the advance commitments received, the company estimates that the probability of successful restructuring is high.
Uncertainty posed by the coronavirus pandemic has decreased as the number of those who have had the illness and been vaccinated has risen. Restrictions have for the most part been lifted and this is forecast to contribute to the easing of the situation in the general economy and construction. However, infection rates remain high and the future development of the pandemic still involves risks, especially with respect to new variants of the virus. Coronavirus shutdowns in China may have significant negative impacts on global delivery chains and thereby on the availability of materials.
One business premises project under construction in Finland involves credit loss risks related to trade receivables. Due to the payment difficulties of the client, the payment of about EUR 15.7 million in trade receivables to SRV was overdue at the end of March. These receivables are secured by a mortgage on the property under construction and pledges on certain other assets. In March, the company filed a lawsuit in the district court to realise the mortgaged property.
More detailed information about the company’s business risks and risk management has been provided in the 2021 Notes to the Financial Statements and Annual Review, which have been published on the company’s website: https://www.srv.fi/en/investors/releases-and-publications/annual-reviews-financial-statements/. In addition, SRV has published a separate Corporate Governance Statement, which includes a general description of the company’s risk management as part of its report on operations. It is available on the company’s website at: https://www.srv.fi/en/investors/cg/.