4	FINANCIAL RISK MANAGEMENT

Financial risk management is carried out by the Group’s Management. Management oversees the general management of risks in specific areas, such as foreign exchange rate risk, price risk, cash flow, and fair value interest rate risk, credit risk, the use of derivative and non-derivative financial instruments and the investment of excess liquidity as well as financial risks and carries out periodic supervision and monitoring.

4.1

Financial Risk Factors

The Group’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk, price risk, fair value interest rate risk and cash flow interest rate risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to hedge certain risk exposures in one of its subsidiaries and considers the use of other derivatives in the event that it identifies risks that may generate an adverse effect for the Group in the short and medium-term.

Market risks

Foreign exchange risk

The Group is exposed to exchange rate risk as a result of the transactions carried out locally in foreign currency and due to its operations abroad. As of December 31, 2017, and 2018 this exposure is mainly concentrated in fluctuations of U.S. dollar, the Chilean and Colombian Pesos. The foreign exchange risk of the investments in Mexico, Bolivia, and Panama are not significant due to the volume of operations.

At December 31, 2018, the consolidated statement of financial position includes the following:


	2017				2018
	S/(000)		USD(000)		S/(000)		USD(000)
Assets		1,851,309		570,511		2,273,132		674,753
Liabilities		1,982,007		610,788		2,042,176		604,383

The Group’s exchange gains and losses for the Peruvian Sol, the Chilean and Colombian Pesos exposure against the U.S. dollar was:


	2016			2017			2018
Gain		742,930			329,751			382,104
Loss		(755,680	)		(323,927	)		(405,380	)

If at December 31, 2018 the Peruvian Sol, the Chilean and Colombian Pesos had strengthened/weakened by 2% against the U.S. dollar, with all other variables held constant, the pre-tax profit for the year would have increased/decreased by S/0.5 million (S/0.1 million in 2017 and S/0.3 million in 2016).

The consolidated statement of changes in equity comprises a foreign currency translation adjustment originated by its subsidiaries. The statement financial position includes assets and liabilities in functional currency equivalent to:


	2017				2018
	Assets		Liabilities		Assets		Liabilities
CLP		77,199,082		74,447,874		48,129,848		49,728,313
COP		101,300,811		74,319,654		163,560,697		76,978,655

The Group’s foreign exchange translation adjustment for 2018 was positive for S/5.7 million (negative for S/11.3 million in 2017).

ii)

Price risk

Management considers that the exposure of the Group to the price risk of its investments in mutual funds, bonds, and equity securities is low since the invested amounts are not significant. Any fluctuation in their fair value will not have any significant impact on the balances reported in the consolidated financial statements.

iii)

Cash flow and fair value interest rate risk

The Group’s interest rate risk mainly arises from its long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. Group policy is to maintain most of its borrowings at fixed rate instruments; 46.9% of total debt in 2018 (57.8% in 2017) was contracted at fixed rates and 53.1% at variable rates (42.2% in 2017) which consisted of a 27.7% fixed rate plus VAC (adjusted for inflation) and the remaining 25.4% at a variable rate (22.9% fixed rate + VAC and the remaining 19.3% at a variable rate in 2017).

The debt subject to fixed rate plus VAC is related to a bond issued in Peruvian Sol to finance the GyM Ferrovias Project, Metro Line 1 (Note 20). Any increase in the interest rate resulting from higher inflation will have no significant impact on the Group’s profit because these revenues are also adjusted for inflation.

During 2018 and 2017 borrowings at variable rates are denominated in Peruvian Sol, and U.S. dollars and the Group’s policy is to manage their cash flow risk by using interest-rate swaps, which are recognized under hedge accounting. However, regarding the variable rate loans related to GSP (Note 19 a-ii), Management decided to assume the risk since it expects to pre-pay them before due.

If at December 31, 2018, the Libor rate plus three months had increased/decreased by 5%, with all other variables held constant, the pre-tax profit for the year would have increased/decreased by S/0.75 million (S/0.49 million in 2017). In 2018 and 2017 there was no significant ineffectiveness in the cash flow hedge.

Credit risk

Credit risk arises from cash and cash equivalents and deposits with banks and financial institutions, as well as customer credit counterparties, including the outstanding balance of accounts receivable and committed transactions. For banks and financial institutions, only independently rated parties with a minimum rating of ‘A’ are accepted.

Concerning to loans to related parties, the Group has measures in place to ensure the recovery of these loans through the controls maintained by the Corporate Finance Management and the performance evaluation conducted by the Board.

No credit limits were exceeded during the reporting period, and Management does not expect the Group to incur any losses from the performance by these counterparties, except for the ones already recorded at the financial statements.

Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash and cash equivalents, the availability of funding through an adequate number of sources of committed credit facilities and the capacity to close out positions in the market. Historically, the Group cash flows enabled it to maintain sufficient cash to meet its obligations. However, as of December 31, 2016, the Group started to experienced liquidity risk due to the early termination of the GSP concession agreement and the obligations assumed (Note 16 a-i). As a consequence, the Group started a disinvestment plan to be able to meet the obligations resulting from this scenario (Note 37).

Group Corporate Finance monitors rolling forecasts of the Group’s liquidity requirements to ensure it has sufficient cash to meet operational needs so that the Group does not breach borrowing limits or covenants, where applicable, on any of its borrowing facilities. Less significant financing transactions are controlled by the Finance Management of each subsidiary.

Such forecasting takes into consideration the Group’s debt financing plans, covenant compliance, compliance with internal statement of financial position ratio targets and, if applicable, external regulatory or legal requirements; for example, foreign currency restrictions.

Surplus cash held by the operating entities over the balance required for working capital management is invested in interest-bearing checking accounts or time deposits, selecting instruments with appropriate maturities and sufficient liquidity.

The table below analyzes the Group’s financial liabilities into relevant maturity groupings based on the remaining period from the date of the statement of financial position to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows.


	Less than		1-2		2-5		More than
	1 year		years		years		5 years		Total
At December 31, 2017
Other financial liabilities (except for finance leases)		1,003,500		336,913		290,253		—		1,630,666
Finance leases		72,864		41,877		24,022		638		139,401
Bonds		109,746		148,986		353,349		1,272,647		1,884,728
Trade accounts payables		1,453,046		—		—		—		1,453,046
Accounts payables to related parties		55,174		25,954		—		—		81,128
Other accounts payables		153,498		34,527		371,976		—		560,001
Other non-financial liabilities		—		383		—		—		383

		2,847,828		588,640		1,039,600		1,273,285		5,749,353


	Less than		1-2		2-5		More than
	1 year		years		years		5 years		Total
At December 31, 2018
Other financial liabilities (except for finance leases)		816,122		273,079		129,233		41,577		1,260,011
Finance leases		15,151		7,489		14,094		—		36,734
Bonds		111,080		153,287		355,667		1,174,404		1,794,438
Trade accounts payables		1,079,531		—		—		—		1,079,531
Accounts payables to related parties		55,941		21,849		—		—		77,790
Other accounts payables		116,806		17,777		338,627		—		473,210
Other non-financial liabilities		—		61		—		—		61

		2,194,631		473,542		837,621		1,215,981		4,721,775

4.2

Capital management risk

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders, benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In 2017 the situation of the Group had lead Management to monitor deviations that might cause the non-compliance of covenants and may hinder renegotiation of liabilities (Note19-a).

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

The Group monitors capital based on the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including current and non-current borrowings), less cash and cash equivalents. Total capital is calculated as ‘equity’ as shown in the consolidated statement of financial position plus net debt.

As of December 31, 2017, and 2018, the gearing ratio is presented below indicating the Group’s strategy to keep it in a range from 0.10 to 0.70.


	2017			2018
Total financial liabilities and bonds		2,637,630			2,139,714
Less: Cash and cash equivalents		(626,180	)		(801,140	)

Net debt		2,011,450			1,338,574
Total equity		2,589,078			2,489,931

Total capital		4,600,528			3,828,505

Gearing ratio		0.44			0.35

4.3

Fair value estimation

For the classification of the type of valuation used by the Group for its financial instruments at fair value, the following levels of measurement have been established.

•

Level 1: Measurement based on quoted prices in active markets for identical assets or liabilities.

•

Level 2: Measurement based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices).

•

Level 3: Measurement based on inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs, generally based on internal estimates and assumptions of the Group).

The table below shows the Group’s assets and liabilities measured at fair value on December 31, 2017, and 2018:


	Level 1		Level 2		Total
At December 31, 2017
Financial assets
Financial assets at fair value through profit or loss		181		—		181
Financial liabilities
Derivatives used for hedging		—		383		383
At December 31, 2018
Financial liabilities
Derivatives used for hedging		—		61		61

There were no transfers between levels 1 and 2 during the year.