Financial risk management

12 Months Ended

Dec. 31, 2018

Exposure to interest rate, foreign currency, non-repatriation, liquidity, capital management and credit risks arise in the normal course of Millicom’s business. Each year Group Treasury revisits and presents to the Audit committee updated Treasury and Financial Risks Management policies. The Group analyzes each of these financial risks individually as well as on an interconnected basis and defines and implements strategies to manage the economic impact on the Group’s performance in line with its Financial Risk Management policy. These policies were last reviewed in late 2018. As part of the annual review of the above mentioned risks, the Group agrees to a strategy over the use of derivatives and natural hedging instruments ranging from raising debt in local currency (where the Company targets to reach 40% of debt in local currency over the medium term) to maintain a 70/30% mix between fixed and floating rate debt or agreeing to cover up to six months forward of operating costs and capex denominated in non-functional currencies through a rolling and layering strategy. Millicom’s risk management strategies may include the use of derivatives to the extent a market would exist in the jurisdictions where the Group operates. Millicom’s policy prohibits the use of such derivatives in the context of speculative trading.

Accounting policies for derivatives is further detailed in note C.6. On December 31, 2018 and 2017 fair value of derivatives held by the Group can be summarized as follows:



	2018	2017
	(US$ millions)
Derivatives
Cash flow hedge derivatives	—	(56	)
Net derivative asset (liability)	—	(56	)

Interest rate risk

Debt and financing issued at floating interest rates expose the Group to cash flow interest rate risk. Debt and financing issued at fixed rates expose the Group to fair value interest rate risk. The Group’s exposure to risk of changes in market interest rates relate to both of the above. To manage this risk, the Group’s policy is to maintain a combination of fixed and floating rate debt with target for the debt to be distributed between fixed (up to 70%) and variable (up to 30%) rates. The Group actively monitors borrowings against this target. The target mix between fixed and floating rate debt is reviewed periodically. The purpose of Millicom’s policy is to achieve an optimal balance between cost of funding and volatility of financial results, while taking into account market conditions as well as our overall business strategy. At December 31, 2018, approximately 68% of the Group’s borrowings are at a fixed rate of interest or for which variable rates have been swapped for fixed rates with interest rate swaps (2017: 65%).

Fixed and floating rate debt

Financing at December 31, 2018



	Amounts due within:
	1 year		1–2 years		2–3 years		3–4 years		4–5 years		>5 years		Total
	(US$ millions)
Fixed rate financing	140		162		137		436		204		2,036		3,115
Weighted average nominal interest rate	6.35	%	6.59	%	6.64	%	6.61	%	4.10	%	6.47	%	6.34	%
Floating rate financing	319		175		266		133		263		309		1,465
Weighted average nominal interest rate	10.28	%	5.89	%	2.73	%	0.49	%	4.41	%	1.13	%	1.98	%
Total	458		337		403		569		468		2,345		4,580
Weighted average nominal interest rate	9.08	%	6.23	%	4.06	%	5.18	%	4.28	%	5.76	%	4.95	%

Financing at December 31, 2017



	Amounts due within:
	1 year		1-2 years		2-3 years		3-4 years		4-5 years		>5 years		Total
	(US$ millions)
Fixed rate financing	87		365		141		104		396		1,369		2,462
Weighted average nominal interest rate	7.17	%	5.52	%	8.28	%	9.92	%	7.73	%	7.68	%	7.48	%
Floating rate financing	98		134		206		327		188		370		1,323
Weighted average nominal interest rate	4.24	%	2.37	%	8.40	%	12.20	%	1.98	%	2.25	%	3.06	%
Total	185		500		347		431		584		1,738		3,785
Weighted average nominal interest rate	5.61	%	4.68	%	8.35	%	11.65	%	5.88	%	6.52	%	5.94	%

A 100 basis point fall or rise in market interest rates for all currencies in which the Group had borrowings at December 31, 2018 would increase or reduce profit before tax from continuing operations for the year by approximately $15 million (2017: $13 million).

Interest rate swap contracts

From time to time, Millicom enters into currency and interest rate swap contracts to manage its exposure to fluctuations in interest rates and currency fluctuations in accordance with its Financial Risk Management policy. Details of these arrangements are provided below.

Interest rate and currency swaps on SEK denominated debt

These swaps matured in April 2018 and were settled against a cash payment of $63 million. Interest rate and currency swaps on SEK denominated debt were measured with reference to Level 2 of the fair value hierarchy.

Interest rate and currency swaps on Euro-denominated debt

In June 2013, Millicom entered into interest rate and currency swaps whereby Millicom will sell Euros and receive USD to hedge against exchange rate fluctuations on an intercompany seven-year Euro 134 million principal and related interest financing of its operation in Senegal. The outstanding 2020 Notes were repaid in August 2017 and as a result these swaps have been settled. The year-to-date 2017 revaluation of the swap resulted in a $22 million loss. The Millicom Group finally received $10 million in cash on settlement date.

The above hedge was considered ineffective, with fluctuations in the fair value of the hedge recorded through the statement of income.

No other financial instruments have a significant fair value at December 31, 2018 and 2017.

Foreign currency risks

The Group is exposed to foreign exchange risk arising from various currency exposures in the countries in which it operates. Foreign exchange risk arises from future commercial transactions, recognized assets and liabilities and net investments in foreign operations.

Millicom seeks to reduce its foreign currency exposure through a policy of matching, as far as possible, assets and liabilities denominated in foreign currencies, or entering into agreements that limit the risk of exposure to currency fluctuations against the US dollar reporting currency. In some cases, Millicom may also borrow in US dollars where it is either commercially more advantageous for joint ventures and subsidiaries to incur debt obligations in US dollars or where US dollar denominated borrowing is the only funding source available to a joint venture or subsidiary. In these circumstances, Millicom accepts the remaining currency risk associated with financing its joint ventures and subsidiaries, principally because of the relatively high cost of forward cover, when available, in the currencies in which the Group operates.

Debt denominated in US dollars and other currencies

Debt denomination at December 31



	2018	2017
	(US$ millions)
Debt denominated in US dollars	3,132	1,983
Debt denominated in currencies of the following countries:
Colombia	718	834
Chad	62	61
Tanzania	112	121
Bolivia	306	337
Paraguay	207	191
Luxembourg (SEK denominated)	43	243
Other	—	15
Total debt denominated in other currencies	1,448	1,802
Total debt	4,580	3,785

At December 31, 2018, if the US dollar had weakened/strengthened by 10% against the other functional currencies of our operations and all other variables held constant, then profit before tax from continuing operations would have increased/decreased by $53 million and $(53) million respectively (2017: $104 million and $(104) million respectively). This increase/decrease in profit before tax would have mainly been as a result of the conversion of the USD-denominated net debts in our operations with functional currencies other than the US dollar.

Foreign currency swaps

See note D.1.2. Interest rate swap contracts.

Non-repatriation risk

Most of Millicom’s operating subsidiaries and joint ventures generate most of the revenue of the Group and in the currency of the countries in which they operate. Millicom is therefore dependent on the ability of its subsidiaries and joint venture operations to transfer funds to the Company.

Although foreign exchange controls exist in some of the countries in which Millicom Group companies operate, none of these controls currently significantly restrict the ability of these operations to pay interest, dividends, technical service fees, royalties or repay loans by exporting cash, instruments of credit or securities in foreign currencies. However, existing foreign exchange controls may be strengthened in countries where the Group operates, or foreign exchange controls may be introduced in countries where the Group operates that do not currently impose such restrictions. If such events were to occur, the Company’s ability to receive funds from the operations could be subsequently restricted, which would impact the Company’s ability to make payments on its interest and loans and, or pay dividends to its shareholders. As a policy, all operations which do not face restrictions to deposit funds offshore and in hard currencies should do so for the surplus cash generated on a weekly basis. The Company and its subsidiaries make use of notional and physical cash pooling arrangements in hard currencies to the extent permitted.

In addition, in some countries it may be difficult to convert large amounts of local currency into foreign currency because of limited foreign exchange markets. The practical effects of this may be time delays in accumulating significant amounts of foreign currency and exchange risk, which could have an adverse effect on the Group. This is a relatively rare case for the countries in which the Group operates.

Lastly, repatriation most often gives raise to taxation, which is evidenced in the amount of taxes paid by the Group relative to the Corporate Income Tax reported in its statement of income.

Credit and counterparty risk

Financial instruments that subject the Group to credit risk include cash and cash equivalents, pledged deposits, letters of credit, trade receivables, amounts due from joint venture partners and associates, supplier advances and other current assets and derivatives. Counterparties to agreements relating to the Group’s cash and cash equivalents, pledged deposits and letters of credit are significant financial institutions with investment grade ratings. Management does not believe there are significant risks of non-performance by these counterparties and maintain a diversified portfolio of banking partners. Allocation of deposits across banks are managed such that the Group’s counterparty risk with a given bank stays within limits which have been set, based on each bank’s credit rating.

A large portion of revenue of the Group is comprised of prepaid products and services. For postpaid customers, the Group follows risk control procedures to assess the credit quality of the customer, taking into account its financial position, past experience and other factors. Accounts receivable also comprise balances due from other telecom operators. Credit risk of other telecom operators is limited due to the regulatory nature of the telecom industry, in which licenses are normally only issued to credit-worthy companies. The Group maintains a provision for expected credit losses of trade receivables based on its historical credit loss experience.

As the Group has a large number of internationally dispersed customers, there is generally no significant concentration of credit risk with respect to trade receivables, except for certain B2B customers (mainly governments). See note F.1.

Liquidity risk

Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. The Group has significant indebtedness but also has significant cash balances. Millicom evaluates its ability to meet its obligations on an ongoing basis using a recurring liquidity planning tool. This tool considers the operating net cash flows generated from its operations and the future cash needs for borrowing, interest payments, dividend payments and capital and operating expenditures required in maintaining and developing its operating businesses.

The Group manages its liquidity risk through use of bank overdrafts, bank loans, bonds, vendor financing, Export Credit Agencies and Development Finance Institutions (DFI) loans. Millicom believes that there is sufficient liquidity available in the markets to meet ongoing liquidity needs. Additionally, Millicom is able to arrange offshore funding. Millicom has a diversified financing portfolio with commercial banks representing about 34% of its gross financing (2017: 30%), bonds 54% (2017: 57%), Development Finance Institutions 4% (2017: 3%) and finance leases 8% (2017: 10%).

Maturity profile of net financial liabilities at December 31, 2018 (i)



	Less than 1 year		1 to 5 years		> 5 years		Total
	(US$ millions)
Total debt and financing	(458	)	(1,778	)	(2,345	)	(4,580	)
Cash and cash equivalents	528		—		—		528
Pledged deposits (related to bank borrowings)	2		—		—		2
Derivative financial instruments (SEK currency swap)	—		—		—		—
Net cash (debt) including derivatives related to debt	72		(1,778	)	(2,345	)	(4,051	)
Future interest commitments	(248	)	(786	)	(77	)	(1,111	)
Trade payables (excluding accruals)	(478	)	—		—		(478	)
Other financial liabilities (including accruals)	(1,217	)	(135	)	—		(1,352	)
Put Option liability	(239	)	—		—		(239	)
Trade receivables	343		—		—		343
Other financial assets	184		126		—		310
Net financial liabilities	(1,583	)	(2,573	)	(2,422	)	(6,578	)

(i) As from 2018, the Group has excluded 'restricted cash' from its definition of Net debt. 2017 figures have been re-presented accordingly.

Maturity profile of net financial liabilities at December 31, 2017



	Less than 1 year		1 to 5 years		> 5 years		Total
	(US$ millions)
Total debt and financing	(185	)	(1,862	)	(1,738	)	(3,785	)
Cash and cash equivalents	619		—		—		619
Pledged deposits (related to bank borrowings)	1		—		—		1
Derivative financial instruments (SEK currency swap)	(56	)	—		—		(56	)
Net cash (debt) including derivatives related to debt	380		(1,862	)	(1,738	)	(3,220	)
Future interest commitments	(255	)	(785	)	(68	)	(1,108	)
Trade payables (excluding accruals)	(427	)	—		—		(427	)
Other financial liabilities (including accruals)	(1,094	)	(124	)	—		(1,218	)
Trade receivables	386		—		—		386
Other financial assets	144		113		—		257
Net financial liabilities	(866	)	(2,658	)	(1,806	)	(5,330	)

Capital management

The primary objective of the Group’s capital management is to ensure a strong credit rating and solid capital ratios in order to support its business and maximize shareholder value.

The Group manages its capital structure with reference to local economic conditions and imposed restrictions such as debt covenants. To maintain or adjust its capital structure, the Group may make dividend payments to shareholders, return capital to shareholders through share repurchases or issue new shares. At December 31, 2018, Millicom is rated at one notch below investment grade by the independent rating agencies Moody’s (Ba1 negative) and Fitch (BB+ stable). The Group primarily monitors capital using net debt to EBITDA.

The Group reviews its gearing ratio (net debt divided by total capital plus net debt) periodically. Net debt includes interest bearing loans and borrowings, less cash and cash equivalents (included restricted cash) and pledged and time deposits related to bank borrowings. Capital represents equity attributable to the equity holders of the parent.

Net debt to EBITDA



	Note	2018	2017
	(US$ millions)
Net debt	C.5.	4,051	3,164
EBITDA	B.3.	1,254	1,278
Net debt to EBITDA (i)		3.23	2.48

(i) Ratio is above 3x on an IFRS basis. However, covenants are calculated on proportionate net debt/EBITDA, including Guatemala and Honduras, which show results below 3x.

Gearing ratio



	Note	2018	2017
	(US$ millions)
Net debt	C.5.	4,051	3,164
Equity	C.1.	2,542	3,096
Net debt and equity		6,593	6,260
Gearing ratio		0.61	0.51