The Company through its subsidiaries carries out transactions with derivative financial instruments, without speculation purposes, but only to mitigate the risks relating to exchange rates and interest and exchange movement, fully comprising the swap contracts, without, therefore, exotic derivatives or other types of derivatives.
The Company, through its subsidiaries, presents its financial instruments according to CVM’s instruction 566, issued December 17, 2008, which approved CPC’s Technical Pronouncement 14, and CVM’s instruction 475, as of December 17, 2008.
Accordingly, the Company and its subsidiaries show that the main risk factors to which they are exposed are as follows:
| (i) |
Exchange rate risk
The exchange rate risk relates to the possibility of the subsidiaries incurring losses resulting from fluctuations in exchange rates, thus increasing debt balances of loans obtained in the market and the corresponding financial charges. In order to mitigate this kind of risk, the Company carries out swap contracts with financial institutions.
As of December 31, 2009 the subsidiaries’ loans indexed to the exchange variance of foreign currencies are fully covered by swap contracts. The income or loss resulting from these swap contracts is charged to operating income.
Besides the loans taken by the subsidiaries, which are the object of swap contracts, there are no other financial assets in significant amounts indexed to foreign currencies.
|
| (ii) |
Interest rate risks
The interest rate risks relate to:
Possibility of variances in the fair value of financing obtained by the subsidiary TIM Nordeste, merged into TIM Celular, at the pre-fixed interest rates, in case such rates do not reflect the current market conditions. For this type of risk to be mitigated, the subsidiary TIM Nordeste enters into swap contracts with financial institutions, transforming into a percentage of the CDI the pre-fixed interest rates levied on a portion of financing obtained. Gains or losses arising from swap contracts affect directly TIM Nordeste’s results.
Possibility of variances in the fair value of financing obtained by the subsidiary TIM Celular and indexed to the TJLP, in case such rates do not proportionally follow the rates regarding the Interbank Deposit Certificates (CDI). For this type of risk to be mitigated, the subsidiary TIM Celular enters into swap contracts with financial institutions, transforming into a percentage of the CDI the TJLP levied on a portion of financing obtained. Gains or losses arising from swap contracts affect directly TIM Celular’s results.
Possibility of an unfavorable change in interest rates, with a resulting increase in financial expenses incurred by the subsidiaries, due to fluctuation of interest rate on part of their hedge debt and obligations. At December 31, 2009, the subsidiaries’ financial resources are mostly invested in CDI, which partially reduces this risk.
|
| (iii) |
Credit risk related to services rendered
This risk is related to the possibility of the subsidiaries computing losses originating from the difficulty in collecting the amounts billed to customers. In order to mitigate this risk, the Company and its subsidiaries perform credit analysis that assist the management of risks related to collection problems, and monitor accounts receivable from subscribers, blocking the telephone, in case customers default on payment of their bills. There is no single client accounting for more than 10% of net receivables from services rendered at December 31, 2009 and 2008 or of income from services in the years then ended.
|
| (iv) |
Credit risk inherent in the sale of telephone sets and prepaid telephone cards
The policy adopted by the subsidiaries for sale of telephone sets and distribution of prepaid telephone cards is directly related to credit risk levels accepted in the regular course of business. The choice of partners, the diversification of the accounts receivable portfolio, the monitoring of credit conditions, the positions and limits defined for orders placed by dealers, and the adoption of guarantees are procedures adopted by the subsidiaries to minimize possible collection problems with their business partners. There is no single client accounting for more than 10% of net receivables from sales of goods at December 31, 2009 and 2008 or of income from services in the years then ended.
|
| (v) |
Financial credit risk
This risk relates to the possibility of the Company and its subsidiaries computing losses originating from the difficulty in realizing its short-term investments and swap contracts. The Company and its subsidiaries minimize the risk associated to these financial instruments by investing in well-reputed financial institutions and by following policies that establish maximum levels of concentration of risk by financial institution.
There is no concentration of available resources of work, service, concessions or rights that have not been mentioned above that could, if eliminated suddenly, severely impact the operations of the Company and its subsidiaries.
Market value of financial instruments
The consolidated financial derivative instruments are as follows:
|
| |
2009 |
2008 |
| |
Assets |
Liabilities |
Net |
Assets |
Liabilities |
Net |
| Derivative operations |
78,264 |
161,322 |
(83,058) |
387,573 |
63,262 |
324,311 |
| |
|
|
|
|
|
|
| Current portion |
49,237 |
48,122 |
|
260,925 |
52,448 |
|
| Long-term portion |
29,027 |
113,200 |
|
126,648 |
10,814 |
|
The consolidated financial derivative instruments as of December 31, 2009 mature as follows:
|
Assets |
Liabilities |
| 2011 |
3,436 |
1,803 |
| 2012 |
2,150 |
937 |
| 2013 |
472 |
24 |
| 2014 |
- |
- |
| 2015 on |
22,969 |
110,436 |
|
29,027 |
113,200 |
The fair values of derivative instruments of the subsidiaries were determined based on future cash flows (assets and liabilities position), taking into account the contracted conditions and bringing these flows to present value by means of discount at the future CDI rate published in the market. The fair values were estimated at a specific time, based on information available and the Company's valuation methodologies.
The Company’s protection policy against financial risk – A summary
The Company’s policy stipulates the adoption of swap mechanisms against financial risks involved in financing taken in foreign or local currency, in order to control the exposure to risks related with exchange variation and interest rate variation.
The derivate instruments against exposure to exchange risks should be contracted concurrently with the debt contract that originated the exposure. The level of coverage to be contracted for these exchange exposures is 100% in terms of time and amount.
When it comes to exposure to risk factors in local currency arising from financing linked to fixed interest rate or TJLP, as the yield on the Company’s and the subsidiaries cash and cash equivalents is based on the CDI, it is the subsidiaries' strategy to change part of these risks into exposure to the CDI.
As of December 31, 2009 and 2008, there are margins or guarantees applying to the operations with derivative instruments owned by the subsidiaries.
The selection criteria followed by financial institutions rely on parameters that take into consideration the rating provided only by renowned risk analysis agencies, the shareholders' equity and the degree of concentration of their operations and resources.
The table below shows the derivative instruments operations contracted by the subsidiaries, in force as of December 31, 2009 and 2008:
| |
Item affected
by swap
mechanism |
|
Reference Value (Notional R$) |
Fair Value |
| |
Currency |
2009 |
2008 |
2009 |
2008 |
| Fixed interest risk vs. CDI |
Part of financing taken from BNB |
BRL |
58,878 |
88,260 |
|
|
| Assets Position |
|
|
|
97,050 |
129,457 |
| Liabilities Position |
|
|
|
(87,767) |
(121,267) |
| Net balance |
|
|
|
9,283 |
8,190 |
| |
|
|
|
|
|
|
| TJLP Risk vs. CDI |
Part of financing taken from BNDES |
BRL |
325,789 |
420,914 |
323,077 |
416,228 |
| Assets Position |
|
|
|
(321,846) |
(412,947) |
| Liabilities Position |
|
|
|
1,231 |
3,281 |
| Net balance |
|
|
|
|
|
| |
|
|
|
|
|
|
| USD Exchange Risk vs. CDI |
Hedge against the risk of exchange variation of loans granted by the Banks Santander, ABN AMRO and Unibanco (Res. 2770), as well as loans granted by the Banks BNP Paribas and BEI |
USD |
939,445 |
274,834 |
|
|
| Assets Position |
|
|
|
839,010 |
332,270 |
| Liabilities Position |
|
|
|
(943,693) |
(291,239) |
| Net balance |
|
|
|
(104,683) |
41,031 |
| |
|
|
|
|
|
|
| JPY Exchange Risk vs. CDI |
Hedge against the risk of exchange variation of loans granted by the bank Santander (Res. 2770) |
JPY |
146,836 |
546,836 |
|
|
| Assets Position |
|
|
|
188,970 |
881,271 |
| Liabilities Position |
|
|
|
(177,859) |
(609,462) |
| Net balance |
|
|
|
11,111 |
271,809 |
| |
|
|
|
|
|
|
| TOTAL |
|
|
1,470,948 |
1,330,844 |
(83,058) |
324,311 |
Fixed interest swap vs. CDI
The operations with derivative instruments are intended to safeguard the Company and the subsidiary TIM Nordeste against possible losses in the case of increase in the interest rate set by Banco do Nordeste do Brasil (BNB), as required by the provisions dealing with financial charges on operations that use the Constitutional Financing Funds's resources obtained under financing operations for expansion of the Company's network in the Northeastern region, in 2004 and 2005. These derivative instruments mature through April 2013 and safeguard approximately 58.96% of all the financing taken from BNB by TIM Nordeste, merged into TIM Celular.
Based on the BNB's current reference rate – 10% p.a. – the financing taken by the subsidiary TIM Nordeste merged into TIM Celular and the respective derivative instruments contracted as part of these financing operations average 11.22% p.a. as a receivable item, and 75.97% of the CDI as a payable item. A possible reversal scenario would occur, if the CDI exceeded the level of 14.77% p.a. These derivative instruments were contracted with Santander and Unibanco, currently named Banco Itaú BBA S.A.
TJLP Swap vs. CDI
These financial derivative instrument operations are intended to safeguard the subsidiary TIM Celular against possible loss of assets due to increase in BNDES's reference rate (TJLP) for financing contracted with that Institution in 2005. Its payable portion is contracted at an average cost in the equivalent to 90.62% of the CDI. These operations currently protect 17.23% of the total financing taken from BNDES, and mature on a monthly basis through August 2013. At December 31, 2009, the subsidiary's book income on this operation is positive, with Santander and UNIBANCO, currently named Banco Itaú BBA S.A., as its partners.
Exchange swap vs. CDI
The derivative instruments of this kind are intended to safeguard the subsidiary TIM Celular against exchange risks involved in contracts signed under BACEN Resolution 2.770, heretofore “2770”, indexed to the USD and JPY, and simultaneously contracted with the respective financing besides the foreign currency denominated loans taken out from BNP Paribas and from BEI. All 2770 lines are safeguarded at an average cost of 129.90% of the CDI for USD-denominated contracts and 114.50% for JPY-denominated ones, the loan from BNP Paribas being hedged at an average cost of 95.01% of the Interbank Deposit Certificate (CDI) and the loan from BEI being hedged at an average cost of 96.46% of the Interbank Deposit Certificate (CDI). As a receivable item, a swap is contracted using the same coupon of the line used. In this case, the exchange variation on financing is fully offset by the variation on contracted swaps.
These swap contracts mature on the same date as the debt, i.e., until July/10 for the financing raised through lines of credit set forth by Resolution No. 2.770, until 2016 for the loan from BEI and until December 17 for the loan from BNP Paribas. These derivative instruments were contracted with Santander, Unibanco (currently named Banco Itaú BBA S.A.), ABN AMRO (currently named Banco Santander), Citibank, Morgan Stanley and BES.
Statement of Sensitivity Analysis – Effect on the swap fair value variation
For identifying possible distortions on derivative consolidated operations currently in force, a sensitivity analysis was made considering three different scenarios (probable, possible and remote) and the respective impact on the results attained, namely:
| Description |
2009 |
Probable Scenario |
Possible Scenario |
Remote Scenario |
| Prefixed debt |
|
|
|
|
| Fair value of swap assets side |
97,050 |
97,050 |
93,847 |
90,875 |
| Fair value of swap liabilities side |
(87,767) |
(87,767) |
(86,975) |
(86,213) |
| Swap – Net exposure |
9,283 |
9,283 |
6,872 |
4,662 |
| |
|
|
|
|
| TJLP-indexed debt (partial amount) |
|
|
|
|
| Fair value of swap assets side |
323,077 |
323,077 |
310,755 |
299,206 |
| Fair value of swap liabilities side |
(321,846) |
(321,846) |
(321,095) |
(320,414) |
| Swap – Net exposure |
1,231 |
1,231 |
(10,340) |
(21,208) |
| |
|
|
|
|
| US-indexed debt (Resolution 2.770, BNP Paribas and BEI) |
839,010 |
839,010 |
1,088,118 |
1,352,968 |
| Fair value of swap assets side |
839,010 |
839,010 |
1,088,118 |
1,352,968 |
| Fair value of swap liabilities side |
(943,693) |
(943,693) |
(947,509) |
(951,525) |
| Swap – Net exposure |
(104,683) |
(104,683) |
140,609 |
401,443 |
| |
|
|
|
|
| JPY-indexed debt (Resolution 2.770) |
188,970 |
188,970 |
236,213 |
283,455 |
| Fair value of swap assets side |
188,970 |
188,970 |
236,213 |
283,455 |
| Fair value of swap liabilities side |
(177,859) |
(177,859) |
(178,127) |
(178,389) |
| Swap – Net exposure |
11,111 |
11,111 |
58,086 |
105,066 |
Because the subsidiaries own only financial derivative instruments intended as a safeguard of their financial debt, the changes in the scenarios are followed by the respective safeguard instrument, thus showing that the exposure effects arising from swaps are not significant. In connection with these operations, the subsidiaries disclosed the fair value of the object (debt) and the financial derivative instrument on separate lines, (see above), so as to provide information on the Company's and its subsidiaries' net exposure in each of the three scenarios focused.
Note that all operations with financial derivative instruments contracted by the subsidiaries are solely intended as a safeguard for assets. As a consequence, any increase or decrease in the respective market value will correspond to an inversely proportional change in the financial debt contracted under the financial derivative instruments contracted by the subsidiaries.
Our sensitivity analyses referring to the derivative instruments in effect as of December 31, 2009 basically rely on assumptions relating to variations of the market interest rate and TJLP, as well as variations of foreign currencies underlying the swap contracts. These assumptions were chosen solely because of the characteristics of our derivative instruments, which are exposed only to interest rate and exchange rate variations.
Given the characteristics of the subsidiaries' financial derivative instruments, our assumptions basically took into consideration the effect of reduction of the main indices (CDI and TJLP) and fluctuation of foreign currencies used in swap operations (USD and JPY), with the following percentages and quotations as a result:
| Risk Variable |
Probable Scenario |
Possible Scenario |
Remote Scenario |
| CDI |
8.55% |
10.69% |
12.83% |
| TJLP |
6.00% |
7.50% |
9.00% |
| USD |
1.7412 |
2.1765 |
2.6132 |
| JPY |
0.0188 |
0.235 |
0.0284 |
A Table of Gains and Losses for the year
| Descriptive Table of Gains and (Losses) on Derivatives |
2009 |
| Fixed interest risk vs. CDI |
3,186 |
| TJLP risk vs. CDI |
2,395 |
| USD exchange risk vs. CDI |
(197,061) |
| JPY exchange risk vs. CDI |
(214,006) |
| Net losses |
(405,486) |