Financing and Financial Position

Financing and Financial Position

In February, the company agreed on the replacement of its EUR 100 million revolving credit facility with the banks that had granted it; the facility was replaced with two separate revolving credit facilities, one of EUR 60 million and one of EUR 40 million. The company’s current EUR 60 million revolving credit facility was replaced with a new revolving credit facility of equal amount, of which EUR 20 million will be repaid in January 2021 and the remaining EUR 40 million in January 2022.The revolving credit facility of EUR 40 million will be used to finance future construction projects. It falls due in January 2022 or within another repayment period agreed for separate construction projects. On 31 December 2019, the company had a total of EUR 18.5 million in commercial papers drawn under the revolving credit facility arrangement, all of which were repaid during the review period.

After the review period, on 17 April 2020, the company made an agreement with the bank syndicate to alter the repayment schedule for the aforementioned EUR 20 million. EUR 5 million will be repaid according to the original schedule in January 2021 and the remaining EUR 15 million will only be repaid in December 2021. At the same time, the company also agreed to halve the minimum operating margin levels contained in its revolving credit facility agreements, as a precautionary measure against potentially weakened profit margins resulting from the coronavirus.

As part of the recovery programme, published on 6 February 2020, SRV announced new measures. SRV will defer payment of interest on its hybrid bonds and repayment of principal on the hybrid bonds and offer the conversion of hybrid bonds into new shares. In March, the Annual General Meeting granted authorisation to convert the current hybrid bonds into equity and to organise a separate share issue amounting to about EUR 50 million. The company has secured the commitment of holders of hybrid bonds valued at a total of EUR 51 million to participate in the conversion of the bonds into equity and EUR 40 million in advance commitments to participate in a separate share issue.

At the end of March, the company drew down a capital loan of EUR 9 million, which is subject to the provisions of Chapter 12 of the Finnish Companies Act. The purpose of the capital loan, already before the contemplated rights issue announced by SRV on 6 February 2020, is to strengthen SRV’s capital structure and to facilitate ensuring compliance in the prevailing uncertain economic situation in these exceptional times with the covenants contained in SRV’s financing agreements. The lenders are OP Life Assurance Company Ltd, Pohjola Insurance Ltd and AS Pontos Baltic, a subsidiary of Pontos Ltd, which may pay for new shares subscribed for in the contemplated rights issue announced by SRV on 6 February 2020 by setting off the principal amount of the capital loan. The capital loan was raised in full to repay some of the EUR 60 million revolving credit facility, which may be re-withdrawn once the rights issue has been completed.

The financial covenants of SRV’s financing agreements are equity ratio, net gearing, minimum operating margin, minimum cash, the interest coverage ratio and certain other restrictions. The interest coverage ratio is the ratio of the Group’s operating margin (EBITDA) to its net financial expenses. The interest cover ratio is tested only if and when new loan financing is withdrawn; the covenant does not prevent the refinancing of existing sources of financing.

The covenant levels of these financing agreements are determined on the basis of the accounting principles in force when the loan agreements were signed. Therefore, IFRS 16 has had no effect on the covenants for existing loan agreements. Recognition of income on the basis of percentage of completion in developer contracting projects and the inclusion of capital loans into equity are taken into consideration in the calculation of the equity ratio covenant. The loan agreements also contain some other deviations from traditional covenant calculation methods, and these are explained in the Notes to this interim report.

The company made a standstill agreement with the bank syndicate that issued the new EUR 60 million and EUR 40 million revolving credit facilities, that is, the loan covenants will not be tested in all respects until 30 June 2020. Insofar as the loan covenants were tested on 31 March 2020, the covenant levels of all loan agreements were met on that date.

Net interest-bearing debt totalled EUR 400.4 (490.8) million at the end of the review period. Net interest-bearing debt saw a year-on-year decrease of EUR 90.4 million. Excluding the impact of IFRS 16, net interest-bearing debt totalled EUR 254.1 million, representing a fall of EUR 63.2 million on the comparison period. Housing corporation loans account for EUR 64.9 (77.1) million of the interest-bearing debt. Cash flow from operating activities was EUR -17.3 (-20.4) million and cash flow from investing activities was EUR 36.9 (-9.4) million. The negative cash flow from operations was mainly due to the fact that no founder contracting projects were completed during the period and the construction of projects under construction proceeded as planned. Cash flow from operating activities was also affected by the fact that the annual interest payment on bonds calculated by the company took place in the first quarter. The cash flow from investments was positively affected by the sales of REDI’s and Tampere Deck and Arena’s holdings.

Net financial expenses since the beginning of the year totalled EUR -11.1 (-3.6) million. Net financial expenses were increased by the EUR -0.8 (-2.0) million earnings impact of ten-year interest rate derivatives, which included the change in their market value and interest expenses paid. When the interest level rises from its current level, a positive change in the fair value of the interest rate derivatives will be recognised in the income statement, and vice versa. EUR 0.2 (0.2) million in interest expenses have been capitalised in accordance with IAS 23 since the beginning of the year. Exchange rate losses in financial expenses totalled EUR -6.5 (2.9) million. IFRS 16 had an impact of EUR -1.5 million on financial expenses.

SRV’s investment commitments totalled EUR 33.5 (58.0) million at the end of March, and mainly consisted of investments in Fennovoima’s Hanhikivi-1 nuclear project and the Tampere Deck and Arena project.

SRV is exposed to changes in the exchange rate of the rouble through its Russian subsidiaries. The weakening rouble led to translation differences of EUR -14.3 (7.6) million, which impacted both shareholders’ equity and the comprehensive result for the period. In addition to currency exchange rate losses of EUR -6.5 (2.9) million in financial income and expenses, the Group also entered similarly derived currency exchange rate losses of EUR -6.3 (4.7) million with no cash flow impact under the profit accounted for by associated companies, which are due primarily to the conversion of currency-denominated loans to roubles. Currency exchange rate losses were reduced by EUR 5.8 (-1.9) million in net hedging returns. The total impact on shareholders’ equity was EUR -21.3 million.

The company’s balance sheet, liquidity and financial position are expected to improve significantly by the end of the second quarter thanks to the share issues. The company’s equity ratio (excluding the impact of IFRS 16) would then improve to more than 30–33 per cent from its current level and gearing to about 70–85 per cent (excluding the impact of IFRS 16). The company has updated its forecast given in the financial statements for the year 2019 with regard to the equity ratio due to the change in rouble exchange rate, and secondly due to changes in the payment schedule plans of interest-bearing debt. Further, estimated cash flow impact has been updated to approximately EUR 85–95 million, to take into account that the contemplated rights issue would be subscribed for in the aggregate amount of the subscription commitments received (EUR 40 million).

Interim Report 1-3/2020, 29 April 2020