4. Financial risk management

4.1 Financial risk factors

TMF Group's operating activities expose it to a variety of financial risks, such as market risks (including foreign currency exchange risk and interest rate risk), credit risk and liquidity risk. TMF Group's overall financial risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on TMF Group's financial performance.

TMF Group's central treasury department (“TMF Group Treasury”) carries out financial risk management under policies approved by the Management Board. TMF Group Treasury identifies, evaluates and hedges financial risks in close co-operation with TMF Group's operating units. Management provides written principles for overall risk management, as well as written policies covering specific areas such as foreign exchange risk, interest rate risk, credit risk, use of derivatives and non-derivative financial instruments and investments of excess liquidity. TMF Group's treasury risk management policy is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in interest rates, foreign currency rates and the currency exposure of certain investments in foreign subsidiaries.

4.2 Interest rate risk

Interest rate risk is the risk that unexpected interest rate changes negatively affect TMF Group's results, cash flows and equity. It is TMF Group's policy to mitigate the effects of interest rate volatility on its results, cash flows and balance sheet within certain boundaries. TMF Group's interest rate risk mainly arises from long-term borrowings. Borrowings issued at variable rates expose TMF Group to cash flow interest rate risk.

TMF Group analyses its interest rate exposure on a periodic basis. Based on this analysis and in close cooperation with its advisors and banks, TMF Group determines whether derivative financial instruments should be in place to limit the interest rate risk in such a way that it has a minimum potential adverse effect on the financial performance of TMF Group.

TMF Group holds derivative financial instruments to hedge its interest rate risk exposures for which TMF Group applies hedge accounting. TMF Group has following Caps:

Nomura 1 – €805 million – July 2023 – April 2025
Goldman Sachs Bank Europe SE – $280 million – October 2023 – January 2027
Nomura 2 – €665 million– April 2025 until January 2027

The cap with Nomura 1 has a strike price of 3.0% meaning that Nomura will pay any EURIBOR 3 months interest rate in excess of 3.0%. The cap with Nomura 2 has a strike price of 4.25% meaning that Nomura will pay any EURIBOR 3 months interest rate in excess of 4.25%. The cap with Goldman Sachs has a strike price of 4.75% meaning that Goldman Sachs will pay any USD TERM SOFR CME 3 months interest rate in excess of 4.75%.

For the applicable interest rates on loans and borrowings reference is made to note 27. For the year ended 31 December 2023 and 31 December 2022, if market interest rates had been 100 basis points higher/lower with all other variables held constant, then this would have the following impact:

4.3 Foreign currency exchange risk

TMF Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the Euro and US Dollar. In several markets client contracts are denominated in Euro or US Dollar although this is not the functional currency in these markets. Foreign exchange risk arises from future commercial transactions, recognized assets and liabilities and investments in foreign operations. Currently, no hedging of foreign exchange risk takes place.

TMF Group has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk. Currency exposure arising from the net assets of TMF Group's foreign operations is managed primarily through limiting the net assets in foreign operations to the extent possible. As such, TMF Group does not apply for net investment hedge accounting in its financial statements.
TMF Group's exposure to foreign currency risk for balance sheet items held in US Dollar in non-USD countries was as follows:

Other currencies on which TMF Group is exposed are GBP, CNY, BRL and SGD however the currency risk for these currencies are not material. Reference is made to note 10.

TMF Group has assessed the impact of hyperinflation in hyper-inflationary economies where it operates. The economies which are subject are Argentina, Turkey and Venezuela. The impact of hyperinflation in Venezuela is not material due to low volume of operations. The impact of hyperinflation in Argentina and Turkey is material and the financial statements are restated for the hyper-inflationary impact for Argentina and Turkey operations. The financial statements are restated for the impact of hyperinflation by applying current cost approach, calculated by applying general price index for Argentina of 255.72 and Turkey of 146.44. 

4.4 Credit risk

Credit risk is the risk that counter-parties fail to meet their contractual payment obligations through insolvency or default as well as credit exposure to clients. TMF Group allocates each exposure to a credit risk grade based on data that is determined to be predictive of the risk of loss (including but not limited to external ratings, audited financial statements, management accounts and cash flow projections and available press information about customers) and applying experienced credit judgement. Credit risk grades are defined using qualitative and quantitative factors that are indicative of the risk of default and are aligned to external credit rating definitions from agencies Moody’s and Standard & Poor’s.

Credit risk arising from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions is managed centrally. For banks and financial institutions, TMF Group's policy is that only independently rated parties with a minimum rating of ‘BBB’ are accepted. However, in certain circumstances (e.g. due to local regulation) banks and financial institutions are used that are not rated and/ or that do not have a minimum ‘BBB’ rating. The use of these banks and financial institutions is kept to the minimum level possible, closely monitored by TMF Group treasury and periodically reported to the Management Board. The preferred bank for external funding and the cash pool is HSBC Bank which has credit rating of ‘A1’ (Moody’s) and ‘A+’ (Standard & Poor’s).

Credit exposures to clients, including outstanding receivables and committed transactions, are managed on a central basis. Each local entity is responsible for managing and analysing the credit risk for each of their clients in conjunction with the global credit control team. Approval from the Group CFO is mandatory before standard payment terms and delivery terms and conditions are contractually agreed with new clients. Creditworthiness of trade receivables are monitored and concentration risks/debtor ageing is managed in order to limit exposures.

TMF Group has no significant concentrations of credit risk. The maximum credit risk exposure of TMF Group's financial assets at the end of the period is represented by the amounts reported under the corresponding balance sheet headings. The impact of the assumption of the Expected Credit Loss +1% or -1% will not have a material impact on the expected credit loss allowance regarding Trade receivables.

TMF Group assumes that the credit risk on a financial instrument has not increased significantly since initial recognition if the financial instrument is determined to have low credit risk at the reporting date.

Details of concentration of credit risk are included in the note of trade receivables (note 21) and financial assets (note 19).

4.5 Liquidity risk

Liquidity risk is the risk that TMF Group does not have sufficient headroom (cash and cash equivalents plus committed credit lines) available to meet both TMF Group's day-to-day operating requirements and debt servicing obligations (interest and debt repayment).

TMF Group treasury mitigates liquidity risk by ensuring TMF Group maintains sufficient cash and marketable securities, the availability of funding from an adequate amount of committed credit facilities and the ability to close out market positions.

Cash flow forecasting is performed by management of the operating entities of TMF Group. These rolling forecasts are monitored to ensure TMF Group's cash and liquidity requirements are sufficient to meet operational needs while maintaining sufficient headroom on its undrawn committed borrowing facilities. This enables management to monitor compliance with borrowing limits.

The table below analyses TMF Group's financial liabilities into relevant maturity groupings based on the period remaining to contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows and including transaction costs. Balances due within 12 months are equal to their carrying balances.

TMF Group's primary sources of finance are secured bank borrowings provided by a syndicate of banks. The senior secured bank borrowings were refinanced on 17 May 2023. As part of the secured bank borrowings, TMF Group has a revolving credit facility totalling €181 million as at 31 December 2023. As at 31 December 2023, the total undrawn revolving credit facilities amounted to €181 million.

On 17 July 2023, amendment and extension of the existing senior loan agreement was executed resulting in principal loans Facility B1 of €955 million, Facility B2 of $400 million; both senior loans with maturity of May 2028 and Revolving Credit Facility of €181 million with maturity February 2028. The interest for Facility B1 is 4.5% plus 3 month EURIBOR (floored at 0%). Interest for Facility B2 is 5.0% plus 3-month USD TERM SOFR CME.
The revolving credit facility from our primary bank consists of a €152 million facility for cash needs of which €152 million is undrawn and a €29 million facility for bank guarantees of which €10 million is not used at 31 December 2023. As at 31 December 2023, the total undrawn borrowing facilities amounted to €162 million.

Refer to disclosure note 27 Loans and borrowings for the overview.

4.6 Capital risk management

TMF Group's objectives when managing capital are to ensure TMF Group's ability to continue as a going concern in order to provide returns to shareholders, benefits to other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. TMF Group's loans and borrowings are considered as the most important items from a capital management perspective.

TMF Group is highly leveraged and management focus is on cash generation. An important KPI used in this respect is the cash flow conversion ratio, which is the percentage of underlying operating result (excluding depreciation, amortisation and impairment charges) converted into cash. Cash flow conversion is calculated as underlying operating result (excluding depreciation, amortisation and impairment charges) plus/ minus working capital movement minus investment in and proceeds on disposal of intangible assets and property, plant and equipment divided by underlying operating result (excluding depreciation, amortisation and impairment charges).

TMF Group treasury monitors cash balances on a daily basis. Appropriate action is taken to optimise interest costs while at the same time safeguarding sufficient liquidity. In order to further increase the efficient management of TMF Group's interest costs and revolving credit facility drawings, TMF Group has a global cash management system and process and continues to enhance cash management operations. This focus should make it possible for TMF Group to pay the interest on loans and borrowings.

The net third party debt excludes transaction costs, long-term supply arrangements, advance client payments and deferred consideration. The liabilities for the financial leases and lease accounting are also excluded as they are offset with their assets.