FINANCIAL RISK AND MARKET CONDITIONS
Currency
KONGSBERG's policy is to limit foreign currency risk for the business areas and for the Group as a whole. At the same time, the Group takes a proactive approach to the importance of currency as a competitive parameter. Accordingly, all significant contractual currency flows are hedged (project hedges). Hedging is also used for anticipated future currency flows (prognosis hedges). These hedges, along with hedges related to major bids in foreign currency, are based on the individual business area's market and competitive situation.
The hedging strategy offsets transient currency fluctuations, and gives the Group time to make operational adjustments in the event of lasting changes.
Although the bulk of KONGSBERG's production takes place in Norway, about 70 per cent of its sales take place outside Norway. Procurements in foreign currencies are equivalent to roughly 35 per cent of sales. This means KONGSBERG has substantial net foreign currency exposure, not least in terms of US Dollars (USD).
The Group's foreign currency exposure is especially high in the offshore market where many of its competitors have their cost base in USD. Many companies competing on the merchant marine market are located in Europe. Keener competition from Asia is increasing currency risk in this segment as well.
For Kongsberg Defence & Aerospace, all new bids will be based on market rates. Defence market customers are less sensitive to currency fluctuations.
At 31 December 2007, the Group had hedged a total of NOK 8.6 billion in foreign currencies, mainly in USD and EUR.
Hedging by objective
The hedging strategy has a two- to three-year perspective. It offsets transient currency fluctuations and gives the Group time to make operational adjustments in the event of lasting changes. We take active initiatives to reduce the effect of currency fluctuations, both by increasing the percentage of production abroad and by increasing the share of our cost base in foreign currencies.
The hedging of net anticipated future foreign exchange earnings in USD and EUR is based on a hedging matrix based on levels and time. For USD, the floor of the matrix is an exchange rate of NOK 6.00. This means that prognosis hedges will not be made in USD as long as the exchange rate is less than NOK 6.
See Note 24 to the consolidated accounts for details on hedging.
| Amounts in MNOK | Value based and agreed exchange rates | More- (+)/ negative (-) 31 Dec 07 | More- (+)/ negative (-) 31 Dec 06 |
| Prognosis hedges (cash flow hedges) | 3 292 | 188 | 57 |
| Currency options | 261 | 14 | - |
| Total cash flow hedges | 3 553 | 202 | 57 |
| Project hedges (fair value hedges) | 5 263 | 248 | 24 |
| Loan hedges | 123 | 2 | - |
| Total | 8 939 | 452 | 81 |
Funding
Satisfactory creditworthiness with financial institutions is a prerequisite for predictability when it comes to funding operational and investment plans. KONGSBERG is considered 'investment grade', i.e. the Group is associated with low risk. Good creditworthiness will reduce refinancing risk and financing costs.
In 2007, KONGSBERG reduced its gross debt to MNOK 700. At year-end 2007, the Group had net cash and cash deposits of MNOK 242. Borrowing requirements vary as a result of seasonal fluctuations in some areas and due to the terms of payment in major defence contracts. Any acquisitions will also affect the need for capital. At the beginning of 2008, KONGSBERG has the following loans in its central funding programme:
| Bond issue | MNOK 300 | Due March 2012 |
| Bond issue | MNOK 400 | Due June 2009 |
At the beginning of 2008, KONGSBERG has placed surplus liquidity of MNOK 700 in short-term deposits with the Group's banks.
KONGSBERG's financing is otherwise based on a syndicated credit facility (a group of banks stands behind the credit facility) of MNOK 1 000 that will mature in 2013. The credit facility was unused at 1 January 2008. Financial and liquidity management is coordinated by Kongsberg Finans, the Group's corporate financial services unit.
Interest
At year-end 2007, the Group's loan programme had an average fixed-rate period of 1.4 years. KONGSBERG has hedged its loans through fixed-interest and interest swap agreements which create predictability.
Interest swap agreements
| MNOK | Due date | Years remaining | |
| DnB 13 | 300 | 17 June 2009 | 1.5 years |
| XiAN 11 | 100 | 17 Dec. 2008 | 1 year |
Otherwise, reference is made to Note 24 to the consolidated accounts.