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Financial Risk Management

12 Months Ended

Dec. 31, 2019

4	FINANCIAL RISK MANAGEMENT

Financial risk management is carried out by the Group’s Management. Management oversees the general management of financial risks, 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, which are supervised and monitor

periodically.

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, 2018, and 2019 this exposure is mainly concentrated in fluctuations of U.S. dollar, the Chilean and Colombian Pesos.

At December 31,

2018 and

2019, the consolidated statement of financial position includes the following:


	2018				2019
	S/(000)		USD(000)		S/(000)		USD(000)
Assets		2,273,132		674,753		2,859,324		862,021
Liabilities		2,042,176		604,383		1,751,479		528,031

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


	2017			2018			2019
Gain		329,751			382,104			390,008
Loss		(323,927	)		(405,380	)		(422,578	)

If at December 31, 2019 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

results for the year would have increased/decreased by S/0.7 million (S/0.5 million in 2018 and S/0.1 million in 2017).

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


	2018				2019
	Assets		Liabilities		Assets		Liabilities
Chilean Pesos		48,129,848		49,728,313		19,915,617		39,193,917
Colombian Pesos		163,560,697		76,978,655		187,119,204		76,446,723

The Group’s foreign exchange translation adjustment

2019 was negative by S/8.2 million (

positive by

S/5.7 million

in 2018

and negative by S/11.3

million

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; 61.8% of total debt in 2019 (46.9% in 2018) was contracted at fixed rates and 38.2% at variable rates (53.1% in 2018) which consisted of a 37.7% fixed rate plus VAC (adjusted for inflation) and the remaining 0.5% at a variable rate (27.7% fixed rate + VAC and the remaining 25.4% at a variable rate in 2018).

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 19). 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 2019 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. In 2018, the variable rate loans related to GSP (Note 18

a-ii),

were not hedged, Management decided to assume the risk since it was expected to

pre-pay

them before due.

December 31, 2019, if the

ibor rate plus three months had increased/decreased by 5%, with all other variables held constant, the

pre-tax

results for the year would have increased/decreased by S/0.01 million (S/0.75 million in 2018). In 2019 and 2018 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.

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, since 2017, the Group experienced liquidity problems due to the early termination of the GSP concession agreement and the obligations assumed (Note 15

a-i).

As a consequence, the Group started a disinvestment plan to be able to meet the obligations resulting from this scenario (Note 36). This plan was met and the GSP debt was terminated. Due to the Covid 19 pandemic as explained in note 37, the Group has considered measures to reduce risk exposure and has implemented a new plan in order to meet its requirements of cash for the different businesses.

Group Corporate Finance monitors rolling forecasts of the Group’s liquidity requirements to ensure it exists 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 ratio targets in the statement of financial position 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 consolidated statement of financial position to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows.


	Less than 1 year		1-2 years		2-5 years		More than 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 (except non-financial liabilities)		980,723		—		—		—		980,723
Accounts payables to related parties		55,941		21,849		—		—		77,790
Other accounts payables (except non-financial liabilities)		116,806		17,777		338,627		—		473,210
Other non-financial liabilities		—		61		—		—		61

		2,095,823		473,542		837,621		1,215,981		4,622,967

	Less than 1 year		1-2 years		2-5 years		More t han 5 years		Total
At December 31, 2019
Other financial liabilities (except for finance leases and lease liability for right-of-use asset)		479,000		147,473		177,018		—		803,491
Finance leases		10,826		3,467		13,346		—		27,639
Lease liability for right-of-use asset		24,966		38,788		31,167		7,603		102,524
Bonds		115,690		157,516		358,461		1,077,960		1,709,627
Trade accounts payables (except non-financial liabilities)		966,620		—		—		—		966,620
Accounts payables to related parties		38,916		21,747		—		836		61,499
Other accounts payables (except non-financial liabilities)		200,098		2,505		194,908		—		397,511
Other non-financial liabilities		—		52		—		—		52
		1,836,116		371,548		774,900		1,086,399		4,068,963

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 minimize 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 the renegotiation of liabilities

(Note18-a).

In extraordinary events as explained in note 37, the Group identifies the possible deviations and requirements and establishes a plan.

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, 2018, and 2019, the gearing ratio is presented below indicating the Group’s strategy to keep it in a range from 0.10 to 0.70.


	2018			2019
Total financial liabilities and bonds		2,139,714			1,723,108
Less: Cash and cash equivalents		(801,140	)		(948,978	)

Net debt		1,338,574			774,130
Total equity		2,489,931			1,876,085

Total capital		3,828,505			2,650,215

Gearing ratio		0.35			0.29

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, 2018, and 2019:


	Level 2
At December 31, 2018
Financial liabilities
Derivatives used for hedging		61
At December 31, 2019
Financial liabilities
Derivatives used for hedging		52

4.4	COVID-19 Pandemic

As a result of the outbreak of Coronavirus 2019 (COVID-19), the Group’s results of operations, financial positions and cash flows have been adversely affected as of the date of this report with potential impacts on subsequent periods, including but not limited to the significant decline in revenue and significant operating cash flow. The impacts may also include additional allowance for doubtful accounts and impairment to the Group’s long-term assets. Because of the significant uncertainties surrounding the COVID-19, the exact financial impact is unpredictable and will depend on future developments, including new information which may emerge concerning the duration of the lockdown which has been extended until June 30th for Perú, until September 18th for Chile and until August 31st for Colombia, the actions taken by authorities and other entities to contain the COVID-19 outbreak, among others, all of which are beyond the Group’s control. The Group will continue to closely monitor the impacts of COVID-19 through the course of the year 2020.

From mid-March until the end of May 2020, substantially all of our engineering and construction and real estate projects in Perú were mandatorily shut down, however, as part of the Government plan to activate some industries by stages, most of our projects of our engineering and construction and real estate segments are gradually resuming. In Colombia the projects under execution were declare as essential projects therefore they continued operating since the beginning of the lockdown. Finally our projects in Chile were shut down but only for few days, after which they resume operations. Our infrastructure operations, were declared essential businesses, therefore have continue operating.

On the liquidity side, the Company has implemented a plan that includes several measures to reduce expenses and preserve cash in response to the ongoing COVID-19 pandemic, including the following: (i) developing a 12-week cash plan, project-by-project, to ensure that the Company will continue to meet its critical obligations during that period, which plan is monitored and updated weekly; (ii) preparing a cash plan for the remainder of the 2020 fiscal year, to identify in advance key liquidity issues that may arise; (iii) identifying and renegotiating certain of the company’s obligations with respect to its suppliers, banks and other third parties; (iv) identifying and reducing non-essential general expenses across the group; (v) reducing headcount, and temporarily reducing salaries of senior management, across the company’s three segments; and (vi) reducing capital expenditures across the company’s subsidiaries. In addition the Group is evaluating the selling of minor assets that will help finance any deficit during the year.