V. Notes to the financial information
33. Financial instruments
Financial instruments constitute the key items in the Group’s consolidated balance sheet. They include capital and interest receivables, loans, trade receivables and liabilities, own bonds, bank loans, finance leases, cash and deposits. These instruments are primarily used for the purpose of conducting ongoing business activity and its financing. The Group does not conclude transactions involving derivatives or any activities related to hedge accounting.
A detailed description of significant accounting policies and methods, including recognition criteria, valuation basis as well as income and costs recognition basis in relation to individual classes of financial assets, financial liabilities and capital instruments are disclosed in Note 2 to the financial statements.
Categories of financial instruments
31.12.2008 31.12.2007
PLN’000 PLN’000
Financial assets
Loans granted and own receivables 247,239 200,927
Loans granted 98,399 82,362
Portfolio of receivables with a determined repayment
schedule 96,840 64,306
Portfolio of receivables without a determined
repayment schedule1 52,000 54,259
Cash and cash equivalents 4,955 1,798 Total financial assets 252,194 202,725 Financial receivables 145,632 112,515
Finance lease liabilities 243 601
Bank Loans and borrowings 52,461 30,509
Liabilities due to bonds issue 49,961 59,467
Other financial receivables 42,967 21,938
1Due to the average period of turnover for the portfolio with no defined repayment schedules being 7 months in 2008, these assets are presented under current assets.
Due to stable margins on individual products, the Management Board regards the carrying amounts of financial assets and liabilities recognized at amortized cost as reliable estimates of their fair value.
The Group classifies its financial instruments according to types of products which generate a given instrument. Financial assets within the category of loans and receivables are classified into the following classes:
1. financial assets arising from receivables financing agreements 2. financial assets arising from loans granted
3. financial assets arising from granted financial guarantees
4. financial assets arising from liabilities refinancing agreements 5. financial assets arising from factoring agreements
6. financial assets arising from medical equipment lease The table below presents financial instruments by defined classes:
Financial instruments by defined classes
31.12.2008 31.12.2007 PLN’000 PLN’000
Financing liabilities 93,866 79,571
Loans granted 98,399 82,362
Guarantees 19,567 23,538
Liabilities refinancing 28,086 10,790
Factoring 6,310 3,938
Finance lease 1,011 728
Total 247,239 200,927
The table below presents revenue made for each class of financial instruments:
In the period covered by the financial statements the Group did not allocate operating expense to the defined classes of financial instruments. Therefore, the net profit realized on individual instrument classes may not be determined.
Financial risk management and capital management
The Group renders financial services using available credit facilities and issue of own bonds. The Group’s financial risk is monitored on an ongoing basis and managed by internal risk reports, which analyze the exposure and risk level. These risks include market risk (including currency risk, interest rate risk and price risk) as well as credit risk, liquidity risk and cash flow interest rate risk.
In managing the financial risk associated with its operations, the Group adopted the principle that the ratio of interest-bearing external financing (bank loans taken out and bonds issued by the Company) to equity should be close to 1.
Year ended
31.12.2008 Year ended 31.12.2007
PLN’000 PLN’000 Class
Revenue from receivables refinancing
(discount, fee, interest) 12,870 15,594
Revenue from loans granted (commission,
interest) 17,745 10,227
Revenue from guarantee services
(commission, interest) 4,665 4,049
Revenue from factoring services
(commission, interest) 1,156 631
Revenue from liabilities refinancing services
(commission, interest) 3,507 1,435
Revenue from other services (commission,
interest) 892 520
Total 40,835 32,456
Equity of the Group comprises the following:
- issued share capital of the parent company, stated at nominal value arising from the Articles of Association and entered in the court register,
- reserve capital, determined by the Articles of Association of the Group companies and the decisions of their authorized bodies,
- other reserve capital created in accordance with the Articles of Association of the parent company,
- retained earnings or unabsorbed losses from previous years,
- exchange differences from translation of the financial statements of the subsidiaries, - net result /profit or loss/ for the current period.
31.12.2008 31.12.2007
Bank loans 52,461 30,509
Issued bonds 49,961 59,467
Equity 107,984 91,351
Debt ratio (debt/equity) 0.95 0.98
Maintaining the debt ratio at such a conservative level enables the Group to minimize the potential liquidity risk.
Investments in the Group's assets portfolio are regulated by the Group's procedures approved by the Management Board, which determine the methods for credit risk control with regard to individual transactions. Compliance with exposure limits and regulations is monitored by risk department personnel on an ongoing basis.
The Group does not make use of or trade in financial instruments – including derivative financial instruments – for speculative purposes.
Foreign currency risk
The Group’s activities expose it to limited financial risks of changes in foreign currency exchange rates and interest rates. The Group does not purchase derivative financial instruments to manage its exposure to foreign currency and exchange rate risk. Foreign currency risk involves changes in the value of the Group’s assets and liabilities as a result of changes in FX rates. The Group renders receivables financing services on Czech and Slovak market to a limited extent. These activities are conducted in the local currency. Therefore, the individual fields of overseas activities have closed foreign currency positions and do not generate foreign currency risk. Items which are exposed to currency risk are the value of Magellan S.A.'s interest in the subsidiaries operating on the Czech and Slovak markets and the value of loans granted to the subsidiaries. The value of capital installments and interest due as at 31 December 2008 was PLN 5,278 thousand. The same item as at 31 December 2007 amounted to PLN 555 thousand.
During the year 2008 and up until the date of these financial statements, the Magellan S.A. Group was not and is not a party to currency contracts (options, futures, forwards) and did not use any other methods to hedge against currency risk.
Interest rate risk and its management
The risk of interest rate change involves indexation of the interest rate applied to assets and liabilities to various base parameters with different reset dates. The yield on the Group’s assets is correlated with the amount of statutory interest, whereas a portion of its financial liabilities bears interest depending on the current market rates (WIBOR, Treasury bills). The Group reduces such a risk by its active policy of maintaining asset profitability in order to secure an adequate margin on transactions, sufficient to cover the risk related to changes in financing costs.
The Group is exposed to interest rate risk as its financial assets have both fixed and floating interest rates. The Group manages this type of risk by maintaining appropriate proportion of fixed and floating rate assets, and by making efforts to match the maturity profiles of financial assets and liabilities and to acquire external financing at the lowest possible costs.
Fixed interest rate applies mainly to regular assets, whereas irregular assets are based on interest rates equal to statutory interest or its multiple.
At the balance sheet date, the value of the portfolio of financial assets of the subsidiaries represented 4% of the value of the Group's portfolio. As at 31 December 2008, the subsidiaries did not use external financing other than loans granted by the parent company Magellan S.A. Therefore, the Management Board concluded that the exposure to interest rate risk is mainly associated with the portfolio of the financial assets and external financing held by Magellan S.A. An analysis of such risk was only performed with respect to the portfolio of financial assets and interest liabilities of Magellan S.A.
The table below presents the share of financial assets and financial liabilities with floating interest rates for Magellan S.A.:
31.12.2008 31.12.2007 Financial assets, including:
Value of financial assets portfolio in PLN’000 236,354 200,208 Portfolio of financial assets based on floating interest
rate % in PLN’000 36,967
-Share of financial assets based on floating interest
rate % in financial assets portfolio 16%
-Financial liabilities, including:
Financial liabilities in PLN’000 135,303 111,613
Financial liabilities based on floating interest rate % in
PLN’000 92,446 70,035
Share of financial liabilities based on floating interest
rate % in financial liabilities portfolio 68% 63%
A variable element, which is, however, exposed to minor fluctuations, is statutory interest rate.
Hedging involves regular assessment of interest rates and of the specific readiness to take risk in order to adjust to current conditions as well as to ensure an optimal hedging strategy by positioning the balance sheet or in the form of protecting interest rates by using diversified interest payment cycles. The interest rate risk is being hedged against by the high level of the internal rate of return realized on individual transactions, which guarantees coverage of potential losses resulting from changes in interest rates.
The table below presents the size of the exposure of the individual categories of assets and liabilities of Magellan S.A. to the interest rate risk. The average interest rate is based on outstanding balances at the beginning of the financial year.
Portfolio of receivables with a determined repayment schedule
Average fixed interest rate % XIRR Carrying value in PLN’000 Maturity
31.12.2008 31.12.2007 31.12.2008 31.12.2007
Up to 1 year 27.66% 22.93% 36,753 52,208
1 to 2 years 24.89% 16.69% 35,836 8,718
over 2 years 21.85% 9.29% 24,251 3,380
Total 25.18% 21.37% 96,840 64,306
Loans
Average fixed interest rate % XIRR Carrying value in PLN’000 Maturity
31.12.2008 31.12.2007 31.12.2008 31.12.2007
Up to 1 year 25.00% 20.22% 39,006 36,063
1 to 2 years 19.50% 16.79% 31,344 27,338
over 2 years 19.75% 15.56% 33,348 19,516
Total 21.65% 18.14% 103,698 82,917
For each maturity range, the table includes the value of contracts for which final payment date is due in the given range
At the balance sheet date, the Company had a portfolio of financial assets with no defined repayment schedule with a total value of PLN 35,815 thousand. Financial assets acquired by the Company within 3 months before the balance sheet date represent 40% of the value of the portfolio of assets with no defined repayment schedule. Based on historical data from the last 12 months, the Company estimates that the average turnover for this category of assets is about 7 months. It can be assumed that, in the next months, a significant part of this portfolio will be covered by novation arrangements and will move into the category of assets with defined repayment schedules.
Bonds
Average fixed interest rate % XIRR Carrying value in PLN’000 Maturity
31.12.2008 31.12.2007 31.12.2008
Up to 1 year 8.97% 7.12% 49,961 19,941
1 to 2 years 7.28% 39,526
over 2 years
Total 8.97% 7.23% 49,961 59,467
Bank credit facilities
Average fixed interest rate % XIRR Carrying value in PLN’000 Maturity
31.12.2008 31.12.2007 31.12.2008
Up to 1 year 9.71% 7.45% 47,720 30,509
1 to 2 years 9.31% 4,741
over 2 years
Total 9.67% 7.45% 52,461 30,509
Based on the data presented above, it can be concluded that the Company's exposure to the interest rate risk does not pose any threat to the level of profit earned. The Company realizes high spreads (exceeding 10%) between the yields on the assets held and the interest rates of external borrowings, which are based on current market rates. In addition, the Company believes that, in the case of a significant increase in the current market rates, which are the basis for calculating borrowing costs, it will be able to compensate for such an increase by the margins realized on the acquired financial assets.
Interest rate risk – sensitivity analysis
Compared with 2007, the Group increased the level of external financing – from PLN 89,976 thousand as at 31 December 2007 to PLN 102,422 thousand as at 31 December 2008. This denotes an increase in external financing by PLN 12,446 thousand, i.e. 14%.
The average level of external financing in 2008 amounted to PLN 102,382 thousand and was PLN 30,513 thousand (42%) higher compared with the average level of external financing in 2007.
The increase in the level of external financing was mainly due to the increase in the available limits of bank loans (an increase of PLN 24,000 thousand compared with the balance as at 31 December 2007), with an accompanying decrease in the value of bonds issued by the Group.
In the 4th quarter of 2008, the Magellan S.A. Group began to feel the impact of the financial crisis on the availability of external financing. Due to deteriorating conditions on the financial markets, in the 4th quarter Magellan S.A. was unable to sell part of its short-term bonds in accordance with previous assumptions. As a result, the level of external financing at the end of the 4th quarter was PLN 10,188 thousand (i.e. 9%) lower than the balance of interest-bearing external borrowings at the end of the 3rd quarter.
The interest rate applied to liabilities arising from external financing is based on:
1. fixed interest rate determined for each tranche - in the case of short-term bonds;
2. floating interest rate conditional upon current market rates (WIBOR) - in the case of bank loans and medium - term bonds.
The financial assets held by Magellan S.A. have both fixed and floating interest rates. Fixed interest rates apply mainly to regular assets, whereas irregular assets are based on interest rates equal to statutory interest or its multiple. Statutory interest rate is a variable, though it is exposed to minor fluctuations. Therefore, it may be assumed that in case of changes in the interest rates and financing costs, the average revenue realized on the financial assets portfolio held by the Company shall remain unchanged.
In the case of considerable share of external financing in the structure of liabilities, its costs exerts a crucial impact on the Company’s financial results. The Company conducted a sensitivity analysis of the result achieved in 2008 to the average costs of external financing.
The method and assumptions underlying the conducted sensitivity analysis:
1. The analysis was conducted based on historical data related to the period from 1 January to 31 December 2008;
2. The average monthly external financing level in the analyzed period was determined at the level of PLN 102,382 thousand;
3. The average monthly costs of external financing was determined at the level of PLN 810 thousand;
4. The average annual costs of external financing was determined at the level of 9.83% p.a.;
5. It was assumed that a change in the financing costs, taking into consideration potential taxation, would translate directly to a change in the net profit generated in the period as well as a change in the external financing level.
6. The analysis was conducted for the costs of external financing in the range of +/- 25% of its actual value.
The conducted sensitivity analysis indicates that a change in the financing costs by 5% of its initial value leads to approximately 2.70% change in the financial result. In the extreme case, a 25%
increase in the financing costs led to a 13.17% decrease in the achieved financial result.
The Company accepts such sensitivity level related to the conducted operations.
Credit risk management
Credit risk refers to the risk that a counterparty defaults on its contractual obligations resulting in financial loss to the Group. Within credit risk management, the Group applies the principle to conclude transactions only with company of proven credit worthiness. If necessary, relevant collateral is obtained as a tool mitigating the risk of financial losses arising from a breach of contractual terms.
The exposure to credit rating risk related to the counterparties is monitored on an ongoing basis, whereas the aggregate value of concluded transactions is distributed over the approved business partners. Credit risk control is executed through limits verified and approved on a quarterly basis by a credit committee.
Due to the fact that the portfolio of financial assets of the subsidiaries at the balance sheet date accounts for approximately 4% of the value of the Group's portfolio, analysis of the credit risk associated with the financial assets held was only performed with respect to the portfolio of financial assets held by Magellan S.A.
The Company's assets consist mainly from loans and receivables to public health care units. These are entities with a legal personality. They independently manage funds received primarily from the
National Health Fund based on contracts regarding provision of health services. The fact that following the liquidation of hospitals, their liabilities are always assumed by the establishing body (statutory authority) is of key importance to the Company’s operations. It significantly reduces the business risk related to activities conducted on the market where such receivables are traded. This form of credit risk mitigation as well as the existence of long-term demand for financial services provided by the Company has formed the basis for focusing the Company’s operations on financing the public sector as its target market. The sector in which the Company operates is safe as to the risk of losing acquired financial assets. Pursuant to the Health Care Units Act of 30 August 1991 (Dz. U. of 14 October 1991) public health care units are not subject to composition and bankruptcy law and their establishing body, i.e. the State Treasury or Local Government Units, assume their liabilities in case of liquidation.
Assets from entities other than public heath care institutions or Local Government Entities account for 3% of the value of the Company's portfolio of financial assets. These assets are secured on both non-current and non-current assets of the debtors.
Therefore, credit analysis of individual transactions is mainly aimed at examining the liquidity risk related to individual assets generated through different categories of services provided by the Company.
In order to minimize credit risk, the Company demands collateral for part of its portfolio. As at 31 December 2008, the Company had the following types of collateral for assets with values as stated below:
- Assignment of receivables under contract
with the National Heath Fund PLN 13,883 thousand;
- Collaterals on tangible assets PLN 20,359 thousand;
The total value of collaterals held by the Group amounts to PLN 34,242 thousand.
In addition, the Company held blank promissory notes issued by the borrowers, with a total value of PLN 62,756 thousand as at 31 December 2008.
The Company estimates that the value of collateral corresponds to the value of assets secured by such collateral, but it does not perform a detailed measurement of the value of collateral at the balance sheet date.
The Company may use the above collateral in the case of delays in the payments envisaged in the repayment schedule, and – for assets with no defined repayment schedule – on the terms and conditions provided for in the agreement.
As regards financial assets, credit risk corresponds to their carrying value disclosed in the Company’s balance sheet. Additionally, credit risk applies to products arising from concluded contingent agreements, agreements regarding disbursement of loan tranches and liabilities refinancing as well as due to financial guarantees granted, whose amounts are disclosed in Note 39 under contingent liabilities.
The details of credit risk are presented in the following table:
31.12.2008 31.12.2007
PLN’000 PLN’000
Balance sheet assets
Finance lease receivables 1,011 728
Other financial assets 246,228 200,199
Trade receivables and other receivables 483 350
Other assets 92 53
Other tax receivables 40 1,345
Total 247,854 202,675
Unconditional off-balance sheet liabilities 11,384 4,456
Risk concentration (with respect to liquidity risk) – description of the scoring system applied and its impact on liquidity risk
The credit risk management method used by the Group was developed based on an analysis of the credit risk profile of the public heath care institutions, from which it arises that, according to the existing legal regulations, such entities cannot be declared bankrupt. Therefore, there is no risk of a loss of assets, and the credit risk has been defined as the ability to pay liabilities within a period acceptable for the Group.
On the basis of these assumptions, the Group developed a system for credit risk assessment, the so-called scoring system, which provides the basis for:
1) assigning rating (from A – highest rating to D – lowest rating), 2) setting the limit for optimal level of exposure.
Based on specified parameters from the scoring system, the Group determines optimal deadlines for payment of amounts due by the given debtor, which on one hand enables optimal calculation of
Based on specified parameters from the scoring system, the Group determines optimal deadlines for payment of amounts due by the given debtor, which on one hand enables optimal calculation of