The main risks to which the Group is exposed are market risk, interest rate risk and risks associated with performance of the building process. The Group is also exposed to a certain degree of credit risk, currency risk and liquidity risk.
Market risk
The Group’s share of the total new housing market in Norway and Sweden lies between 3.5 and 5 per cent. In order to sell and produce houses, the Group is equally dependent on its own market performance as the market performance per se. The Group seeks to limit its market risk by concentrating building operations on projects outside urban centres and populated zones, thus avoiding the market’s most volatile area. Priority is also given to production-efficient and reasonably priced family homes. These products represent the majority of the market.
There is also a strong focus on long-term brand building and professional customer service. The Group has a number of defined and well-established decision-making processes for the acquisition and implementation of pre-sale construction. Started but unsold units are monitored very closely.
Implementation risk
Implementation risk relates to the ability to deliver as planned, which can be affected by failure to keep to schedule (daily fines), costs related to building/production processes and excessive claim/warranty costs.
Measures to ensure project schedules are adhered to include order backlog monitoring, resource plans, use of the company’s own carpenters and production workers, efficient logistics systems and central and local purchase agreements. With regard to cost risk, a large proportion of component prices are fixed in the short term by means of land purchase contracts, agreements for the purchase of building materials, fixed-price contracts with sub-contractors and agreements on wages and working conditions. Although increases in the prices of components may occur, the majority of customer contracts have a regulation clause linked to the construction cost index. The Group also invests considerable resources in calculating projects which are in progress or planned, and seeks to avoid overruns by means of active construction management.
The Group endeavours to keep the cost of claims and warranties to a minimum by high prioritisation of quality in all parts of the chain. The Group’s quality systems (ISO 9001 certification) play a central role in this regard. These systems document processes and routines for the entire operation, including procedures for non-conformances, claims and improvements. The Swedish companies are also environmentally certified to ISO 14001. New products and processes are tested on a small scale before being taken into use in all the companies.
Credit risk
The Group minimises credit risk by ensuring customers produce proof of financing and that houses are paid for before being handed over. Special credit checks are conducted for potential major customers. Consequently, bad debts are insignificant.
Interest rate risk
Changes in interest rates represent a market risk through their effect on demand for housing and a cost risk associated with interest rates for the company’s borrowings and working capital loans. Changes in interest rates may also affect the valuation of the company’s assets, including goodwill and trademarks. Most of the Group’s working capital loans carry floating interest rates. Until 2009, the Group had forward rate agreements for approx. 38 per cent of its debt. These were settled when the SEK debt were switched to NOK, See also the next section.
Currency risk
The Group’s investment in the Swedish subsidiary BWG Homes AB was largely financed by means of bank loans in SEK, in order to reduce the currency risk associated with the subsidiary’s net assets. In this connection, the Group was exposed to currency risk in that its total debt was affected by the movements of the Swedish krona. At the end of 2009, the bank loans were converted into NOK after the exchange rate fell from 0.9042 at the end of 2008 to 0.81 at the end of 2009.
The remainder of the Group is also exposed to direct currency risk to a minor extent. Only a small part of the Group’s purchases are directly from abroad. These purchases are hedged by means of forward exchange contracts in NOK. The Group may be indirectly exposed to currency risk associated with the purchase of goods and services from sub-contractors. This risk is considered to be low.
Liquidity risk
Reduced earnings can result in weaker liquidity. However, the Group has a considerable liquidity reserve, which means that, with good warning systems, there will be sufficient time to implement the necessary adaptations. The Group’s non-current debt is due for settlement in January 2012 and will have to be refinanced before the settlement date. The absence of refinancing would result in liquidity changes, although there are no indications of any difficulties in renewing the financing. The Group expects growth in its business operations. Growth in the Norwegian operation will have to be balanced against access to financing.
Internal control
BWG Homes has a comprehensive framework for internal control of its activities. Internal control systems encompass quality systems, decision-making procedures, planning processes, reporting, risk assessment and ethical guidelines.