Market risk

Under market risk, we mean the impact from the changes in different markets, where group companies do not participate daily professionally, on the financial position of the group. In particular, international money and capital markets are such markets that have an impact on the financial position of the group.

Interest rate risk

Interest rate risk arises from changes in money market interest rates, which may result in the need to revalue the company’s financial assets and take into account future increases in financing costs. Most of the interest rates on the Group’s bank loans are not fixed, but are linked to the Euribor or the interbank money market interest rates of the countries where the companies are located. As a rule, the group does not issue loans to third parties, the loans granted by way of derogation are short-term, predominantly fixed-rate and therefore are not affected by the change in base interest. In addition to the risk of Euribor changes, the refinancing of liabilities entails the risk of changes in the risk margin due to changes in the economic environment. This is most directly reflected in the possible need to conclude or extend credit agreements at less favourable interest rates. Management considers that interest rate risk may result in a significant negative impact on the financial position only if there is a high debt burden during the period of interest rate increases and that the interest risk is accordingly managed through measures to limit net debt and keep high capitalisation.

Currency risk

The Group’s economic activities are mostly conducted in the currencies of the countries where the Group companies are located: euros in Estonia, Latvia and Lithuania, and krones in Norway. Intra-group transactions are generally made in euros. To eliminate currency risks, we monitor the proportions of the company’s financial assets and liabilities in different currencies, and when concluding long-term construction contracts, we prefer the euro as the contract currency in the Baltic countries and the krone in Norway. Given the fact that the materials and services used in construction are generally supplied from local markets or from the European Union, the Group’s exposure to currency risk is minimal.

Currency risks can increase during periods when changes in the external environment disrupt established supply chains (for example, the Covid-19 pandemic or the war in Ukraine) and force materials that become more scarce to be procured from outside the European Union, for example from Turkey or the United Kingdom. In such cases, the need to hedge excessive currency risks arising from longer-term supply contracts with currency options or forwards is assessed, and the cost of using these instruments is included in the net cost of the purchased materials.

As a new type of market risk, the price risk of the CO2 quota may be added to the construction and real estate sectors in the near future if the European Union green turnaround introduces an obligation for companies operating in these sectors to acquire a CO2 quota to cover the CO2 footprint of buildings and installations. The group will monitor developments in the evolution of the legislation regulating the imposition of this burden, the emergence of cycles in existing CO2 trading, as well as the development of risk mitigation instruments to be ready to manage this type of market risk from 2026 onwards.