Financial risks include risks related to adequate capitalisation level and financing, currency, interest rate and credit risk. Financial risks are managed by the accounting and finance rules, as well as audit. The group’s finance department is responsible for forecasting the cash flows of Merko Ehitus, continuously monitoring various subsidiaries’ cash positions and forecasts. The group has enacted a regular budgeting procedure whereby the group’s annual forecasts are updated as a minimum three times per year.
In its daily activities, the group needs to consider various financial risks. The key risks include: market risk (incl. interest rate risk and foreign currency risk), credit risk, liquidity risk and equity risk. Based on the group’s balance sheet structure and position in the market, none of these risks have a significant impact as at the date of preparation of the financial statements. The group’s risk management is based on laws, regulations, requirements and regulations arising from International Financial Reporting Standards, as well as the group’s internal regulations and good business practices. The group’s finance department is responsible for management of financial risks.
Credit risk relates to a potential damage which would occur if the parties to the contract are unable to fulfil their contractual obligations. For mitigating credit risk, the payment behaviour of clients is constantly monitored, their financial position is analysed and if necessary, third persons are engaged as a guarantor in transactions. Construction activities are partially financed by customer prepayments. As a rule, a precondition for receiving a prepayment is a bank guarantee for the prepayment submitted to the customer. Free cash is mostly held in bank account or term deposits at Swedbank, LHV, SEB, Luminor and OP Corporate Bank bank groups. The management estimates that the group is not exposed to significant credit risk.
The group’s customers are primarily large local entities or public sector entities with well-known and sufficient creditworthiness.
The group keeps running track of payment history for all customers separately for each receivable. According to management estimates, which are based on customers’ historical payment behaviour and background assessment on the payment behaviour of new clients, the management estimates that there are sufficient reasons to conclude that the receivables will be paid off by the buyers. Trade receivables and receivables from customers of construction works under the stage of completion method have not been guaranteed with additional collateral as is customary in the industry.
The group has granted loans to joint ventures, the economic activities of which the group has a good overview of, and therefore, no additional collateral is required. The loans granted to unrelated legal entities are secured by mortgages.
The group’s liquidity or solvency represents its ability to settle its liabilities to creditors on time. In addition to available current assets, and to ensure liquidity and better management of cash flows, the group has concluded overdraft agreements with banks.
The management estimates that the group’s capital structure, the level of and a moderate proportion of interest bearing liabilities of the balance sheet total – ensures the group’s trustworthiness for creditors. It also allows for an extension of existing financial liabilities and raising of additional debt, if necessary.