Financing and Financial Position

Financing and Financial Position

Net interest-bearing debt totalled EUR 197.7 million (170.0 12/2021) at the end of the review period. Net interest[1]bearing debt saw year-on-year growth of EUR 27.7 million. Excluding the impact of IFRS 16, net interest-bearing debt totalled EUR 110.1 million (81.0 12/2021), representing a rise of EUR 29.1 million on the comparison period. Housing corporation loans account for EUR 21.2 million (18.1 12/2021) of the interest-bearing debt.

At the end of the review period, the company’s equity ratio (excluding the impact of IFRS 16) was 9.7 per cent (32.8 12/2021) and gearing (excluding the impact of IFRS 16) was 343.2 per cent (47.5 12/2021). 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. The equity ratio and gearing levels were significantly impacted by the impairment of Russian business functions due to Russia’s invasion of Ukraine and the related economic sanctions. 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.

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. At the end of the review period, EUR 10 million of the company’s EUR 30 million revolving credit facility was withdrawn and EUR 20 million was unused. During the standstill period, the unused portion of the company’s revolving credit facility, EUR 20 million, can be used as a source of liquidity with certain limitations. EUR 30.5 million of the company’s EUR 40 million committed project financing facility was unused at the end of the review period. In addition, the company’s EUR 63 million non-committed project financing facility was entirely unused at the end of the review period.

At the end of the period, the Group’s financing reserves totalled EUR 58.2 million (100.1 12/2021), consisting of unused project loans (EUR 1.0 million), an undrawn revolving credit facility (EUR 20 million) and cash and cash equivalents (EUR 37.2 million). Financing reserves were affected by EUR -25.8 million (-23.3 3/2021) in cash flow from operating activities and investments, EUR -4.5 (-10.7) million in cash flow from financing activities, and a decrease in undrawn project loans. In March 2022, the company made partial repayments of bonds as planned to a total nominal value of EUR 5.1 million.

In April 2022, the company decided to pursue the comprehensive restructuring of its financing as a result of the impairment of Russian business functions due to Russia’s invasion of Ukraine and the related economic sanctions. These impairments have a substantial impact on SRV’s shareholders’ equity and equity ratio, and restructuring is intended to counteract the effects of these impairments by strengthening equity.

The contemplated reorganisation of the company’s financing is comprised of the following measures:

  • (i) a rights issue for approximately EUR 35 million that is issued to the company’s current shareholders (the “Rights Issue”);
  • (ii) the conversion of the company’s EUR 100 million unsecured fixed-interest bond which becomes due and payable on 23 March 2025 (with an outstanding unpaid principal of EUR 34.9 million) and another EUR 75 million unsecured fixed-interest bond which becomes due and payable on 27 March 2025 (with an outstanding unpaid principal of EUR 64.9 million) (the “Bonds”) into hybrid convertible bonds in written procedure (“Hybrid Conversion”). The conversion into a convertible bond will be executed by amending the terms of the Bonds by including in the terms a special right under the Companies Act to convert the Bonds into shares. In addition, the holders of the Bonds will be given the opportunity to tender their Bonds for full or partial redemption at a price that corresponds to 60% of the nominal value of the Bonds (“Tender”);
  • (iii) using the EUR 45 million hybrid bond issued on 22 March 2016 (with an outstanding unpaid principal of EUR 11.8 million) and the EUR 58.4 million hybrid bond issued on 23 May 2019 (with an outstanding unpaid principal of EUR 3.6 million) (the “Hybrid Bonds”) to subscribe the company’s shares for 45% of the Bonds’ principal as part of a directed share issue of a maximum of EUR 6.9 million, which will be directed to the holders of the Hybrid Bonds (the “Directed Share Issue”). Altogether 55% of the principal of the Hybrid Bonds and any unpaid interest that has accumulated for the Hybrid Bonds as of the moment of conversion will be cut entirely as part of the arrangement; and
  • (iv) the extension of the liquidity and project financing facility granted to SRV (the “Credit Facility”) by 12 months and the implementation of necessary amendments to the agreement governing the Credit Facility in order to account for the new equity structure and the impact of the company’s Russian business operation in those terms and conditions the fulfilment of which may be affected by the changed circumstances.

The subscription price in the Rights Issue, when exercising the right to convert the Bonds into shares and in the Directed Share Issue, is EUR 0.10 per share.

The implementation of the measures requires for (i) the company’s general meeting to decide on the authorisation of the Rights Issue with a simple majority and on the authorisation of the granting of special rights in connection with the Hybrid Conversion and the Directed Share Issue with a qualified majority of two thirds of all given votes and shares represented at the meeting as set out in Chapter 5 Section 27 of the Finnish Limited Liability Companies Act; (ii) those holders of the Bonds that represent 75% of the unpaid principal of the relevant Bond represented during written procedures to vote in favour of the Hybrid Conversion during written procedures; and (iii) those holders of the Hybrid Bonds that represent 75% of the total combined nominal value of the relevant Hybrid Bond represented during written procedures to vote in favour of the amendments that will enable the conversion and write-down of the Hybrid Bonds. Written procedures for Bonds and Hybrid Bonds begin on 28 April 2022. The company aims to complete the written procedures during the second quarter of 2022.

Shareholders that represent 73.5% of all shares in the company have warranted to the company that they will vote in favour of the authorisations that will be granted for the Rights Issue, the Directed Share Issue and the granting of special rights in connection with the Hybrid Conversion at the extraordinary general meeting. In addition, the company’s creditors that represent (i) 60.8% of the principal of the Bond that becomes due and payable on 23 March 2025; (ii) 51.5% of the principal of the Bond that becomes due and payable on 27 March 2025; (iii) 28.8% of the principal of the Hybrid Bond that was issued on 22 March 2016; and (iv) 56.2% of the principal of the Hybrid Bond that was issued on 23 May 2019 have issued a written undertaking to the company where they state that they will vote in favour of the required amendments during the written procedures. In addition, the company and its key lenders have agreed upon a standstill period that will last until 30 June 2022, during which the lenders have waived, among other things, their cancellation and termination rights of the Credit Facility that will result from the write-down of the assets located in Russia on the condition that the aforementioned reorganisation of the company’s financing will be executed and implemented. The company and its key lenders have also signed a term sheet document that sets out the new main terms and conditions that apply to the Credit Facility. SRV is confident that the final agreement regarding the amendments to the Credit Facility will be signed by the end of June 2022.

In the event that the aforementioned contemplated measures will be implemented, the company’s equity will increase approximately by EUR 100 million and the company’s interest-bearing debt will be reduced approximately by EUR 100 million compared to situation on 31 March 2022 and the company’s equity ratio (IFRS 16 adjusted), as per 31 March 2022, would rise from 9.7% to approximately over 35%.

The financial covenants of SRV’s financing agreements are equity ratio, 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 interest cover ratio covenant of the bonds limits the company from taking on additional debt if the covenant is not met and the amount of SRV’s drawn down loans, such as the commercial paper programme, revolving credit facility, overdraft facilities, pension insurance (TyEl) re-lending, and hybrid loans or some other loans would exceed EUR 100 million after taking new debt. At the end of March, the drawn amounts for the items referred to above amounted to EUR 25.4 million in total. The covenant levels of these financing agreements are determined on the basis of the accounting principles in force when the loan agreements were signed. 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. The main covenants of the financing agreements are presented in note 11 to the interim report. In connection with the financing arrangements, the covenant levels and calculation methods will be renegotiated.

SRV’s investment commitments totalled EUR 19.7 million (19.7 12/2021) at the end of March, and consisted of investments in Fennovoima and the Tampere Central Deck and Arena project.

SRV is exposed to changes in the exchange rate of the rouble through its Russian subsidiaries, associated companies and joint ventures. The strengthening rouble led to translation differences of EUR -3.8 million (1.3 1–3/2021), which impacted both shareholders’ equity and the comprehensive result for the period. In addition to currency exchange rate gains with no cash flow impact amounting to EUR -1.2 (0.6) million in financial income and expenses, the Group also entered similarly derived currency exchange rate losses of EUR -2.7 (0.5) million with no cash flow impact under the profit accounted for by associated companies, which are due primarily to the conversion of currency[1]denominated loans to roubles and the stronger rouble exchange rate. The total impact on shareholders’ equity was EUR 7.7 million. As a result of write-downs of Russian holdings, the currency risk position has decreased considerably. The remaining position is presented in note 12 to the interim report.

The weakening of the ruble, with respect to SRV’s holdings in Russia, has had a cumulative direct effect on the amount of equity as a conversion difference totalling EUR -21.9 million through the statement of comprehensive income. In connection with the divestment of the assets, the accumulated negative conversion difference will be recorded as an expense in the income statement at a later date but it has no effect on total equity or operating profit.

Interim report 1-3/2022, 28 April 2022