Factors relating to market risks

Market risk management

The Group has an active approach to managing its market risk exposure. The objectives of market risk management are:

  • to limit fluctuations in profit/loss before tax,
  • to increase the probability of meeting budget assumptions,
  • to maintain a healthy financial condition, and
  • to support the process of undertaking strategic decisions relating to investing activity, with attention to sources of capital for this activity.

All the market risk management objectives should be considered as a whole, while their realization is dependent primarily upon the internal situation and market conditions.

The Group applies an integrated approach to market risk management. This means a comprehensive approach to the whole spectrum of identified market risks, rather than to each of them individually. The primary technique for market risk management is the use in the Group of hedging strategies involving derivatives. Apart from this, natural hedging is also used to the extent available.

All of the potential hedging strategies and the selection of those preferred reflect the following factors: the nature of identified market risk exposures of the Group, the suitability of instruments to be applied and the cost of hedging, current and forecasted market conditions. In order to mitigate market risk, derivatives are primarily used. The Group transacts only those derivatives for which it has the ability to assess their value internally, using standard pricing models appropriate for a particular type of derivative, and also these which can be traded without significant loss of value with a counterparty other than the one with whom the transaction was initially entered into. In evaluating the market value of a given instrument, the Group relies on information obtained from particular market leading banks, brokers and information services.

It is permitted to use the following types of instruments:

  • swaps,
  • forwards and futures,
  • options.

Currency risk

The Group is exposed to the currency risk resulting from fluctuations in exchange rate of the Polish zloty against other currencies. Sales revenues generated by the Group are denominated primarily in the Polish zloty, while a portion of operating costs and capital expenditures are incurred in foreign currencies. Cyfrowy Polsat Group is party to the commercial liabilities (including liabilities on account of purchase of access to the offer of leading film and TV studios as well as other providers and producers of programming content, purchase of modems, parts to set-top boxes, other technical hardware and software and transponder capacity leases) which are denominated in foreign currency, mainly in EUR and USD. We have no impact on currency fluctuations, and any unfavorable changes in exchange rates of the Polish zloty against other currencies may lead to substantial increase of our costs after conversion to Polish zloty, which in turn may have a material adverse effect on our business, financial condition, results of operations or prospects.

In the event of utilizing the Revolving Loan granted to us in a different currency than Polish zloty, we may be exposed to the currency risk, as the rate of exchange of EUR or USD, or any other currency allowed by the Combined Senior Facilities Agreement of September 21, 2015, against Polish zloty may result in increasing the value of cash in Polish zloty required for servicing the repayment of principal and interest of the Revolving Loan.

Interest rate risk

Changes in market interest rates have no direct effect on the Group’s revenues, however, they do have an effect on net cash from operating activities due to interest earned on overnight bank deposits and current accounts, and on net cash from financing activities due to interest charged on bank loans. In particular, the liabilities resulting from the Combined Senior Facilities Agreement of September 21, 2015 and the liabilities resulting from the Series A Bonds Terms have variable interest rates – WIBOR, EURIBOR or LIBOR which are subject to periodical changes, increased by a relevant margin.

Despite the fact that the Group intends to maintain certain hedging positions, in order to hedge against WIBOR interest rate risk, there is no assurance that such a hedging will be possible or whether it will be available on acceptable terms.

The Group regularly analyses its level of interest rate risk exposure, including refinancing and risk minimizing scenarios. Based on these analyses, the Group estimates the effects of changes in interest rates on its profit and loss

Interest rate fluctuations may limit the Group’s ability to satisfy current liabilities and may have a a material adverse effect on our business, financial condition, results of operations or prospects.