Risk management

Restrictions related to the impact of the coronavirus pandemic (COVID-19) affect directly and/or indirectly social life and the economic situation and their results may include increasing the level of unemployment, reducing the level of consumption, limiting the possibility of running business freely, increasing the risk of loss of liquidity of entrepreneurs. There is a risk that the aforementioned restrictions and their negative effects may translate into increased likelihood that some of the following risk factors affecting the Issuer Group’s ability to service its debt will materialise. The effects of the pandemic are affecting and may adversely affect the business and financial performance of the Issuer’s Group.

The armed conflict that began on 24 February 2022 in Ukraine and its consequences, as well as the actions taken by international communities against Russia are events that affect the Company’s and the Group’s operations and future financial performance is. Apart from the design work carried out on the contract concerning the Shehyni road border crossing, Unibep does not currently carry out any construction work in Ukraine, Belarus or Russia. The Company has no intention of withdrawing from the Ukrainian market. Unibep maintains its intention to implement projects, while further cooperation and performance of contracts in Ukraine depends on the development of the geopolitical situation in the region.

There are entities employing Ukrainian citizens among Unibep’s subcontractors and collaborating companies on the Polish market.. The Group is in ongoing contact with its business partners and monitors the impact of the conflict on the performance of contracts to which the Group entities are a party. At present, Unibep does not identify any risks in this area. Contractors are completing the works without any downtime.

The war in Ukraine is a huge challenge for the construction industry, including Unibep. Many private investors have held back their decisions and are waiting to see how the situation will develop. As of today, this causes difficulties in terms of reliable contract valuation and, consequently, long-term planning.

It cannot be ruled out that in the event of an escalation of the conflict or as a result of sanctions imposed on Russia by the international community, the conflict may significantly affect the Group’s operations, either directly or indirectly. Some of the limitations associated with this are noticeable. The problem affects such areas as: interrupted or disrupted supply chains, which may result in restrictions on the availability of raw materials from Ukraine and Russia; availability of raw materials and materials; influence on the level of prices of purchased materials (in particular steel, fuels and crude oil derivatives); an outflow of workers from Ukraine, which may have an impact on the availability of workers in the construction sector; increased investment financing costs; assessment of Poland’s attractiveness by foreign investors.

The Company is analysing the situation and building scenarios for action in case the conflict escalates. The Company’s representatives are in regular contact with business partners (contracting entities, subcontractors, material suppliers), engage in a dialogue with non-governmental organisations, as well as contracting entities from the public sector.

As part of their operations, the Issuer’s Group companies enter into contracts that are (or may be) denominated or expressed in foreign currencies. In terms of export earnings, hedging against foreign exchange risk is primarily effected through a natural hedging mechanism, which consists of signing agreements with subcontractors in the currency of the agreement, thus transferring the risk to them.

It is the intention of the Issuer’s Group to close the foreign currency position by balancing foreign currency transactions related to revenue and expenses. The Issuer has signed contracts concerning foreign currency transactions with banks, enabling it to use hedging instruments, provided that closing a natural position in the given period is not possible.

The strategy of the Issuer’s Group regarding financial instruments hedging foreign exchange risk is based on the following two main assumptions:

1. hedging amounts not greater than the planned foreign exchange flows,
2. using simple and predictable tools, e.g. forward or unrealistic forward.

The Issuer’s Group enters into specific transactions denominated in foreign currencies. As a result, there is a risk of exchange rate fluctuations. This risk is managed under the approved foreign exchange risk management procedure. The Issuer’s Group is particularly exposed to fluctuations of NOK/PLN, SEK/PLN and EUR/PLN exchange rates, hence it continuously analyses fluctuations of such exchange rates. The Issuer’s Group enters into derivative transactions in order to hedge its exposure to foreign exchange risk. The rules governing the use of derivatives are included in the foreign exchange risk man agement procedure.

Trade receivables are also among the Group’s assets exposed to an increased credit risk. Before signing a contract, each counterparty is assessed in terms of its ability to meet its financial obligations. A significant portion of the current contracts are performed for proven and reliable partners (subsequent contracts). In case of doubts regarding the counterparty’s ability to pay, entering into a contract is subject to establishing appropriate security (in cash or on property).

In addition, contracts signed with investors include clauses providing for the right to suspend the performance of works if there is a delay in the payment of amounts due for provided services. If possible, contractual provisions which make payments to subcontractors conditional on receiving funds from the investor are also agreed. However, it cannot be ruled out that a possible downturn in the property market and the construction industry will affect investors’ ability to pay, and thus increase the credit risk of the Group’s counterparties.

There is a risk that the Group’s contracting entity will not make the agreed payments, despite completing a given stage of work, which may lead to reducing the Group’s financial liquidity and, in extreme cases, to financial losses. In order to mitigate the liquidity risk, the Group maintains an adequate amount of cash and enters into credit facility contracts with banks, which serve as additional liquidity security.

It is the intention of the Group’s companies to sign contracts only with reliable and financially sound partners, who have access to bank financing. The Group uses its own funds to finance investment purchases, ensuring that the financing structure for this type of assets is sufficiently sustainable. In view of the fact that the investment programme is also implemented through subsidiaries (the majority of shares in the companies belong to UNIEBP S.A. or its subsidiary, i.e. UNIDEVELOPMENT S.A.), the Group grants internal loans for its implementation. Large residential and commercial projects are and will be implemented through . New projects are financed from the company’s own funds, bank loans or bond issues. Liquidity management is supported by the current system of monitoring expected revenues and expenditures, by means of an appropriate IT system module. Taking into account the aforementioned measures taken, the Group’s financial condition and the security provided with credit facilities, liquidity risk should be considered limited.

Due to the situation across Poland’s eastern border, the Issuer’s Group is particularly exposed to the political risks of these markets. At present, it is expected that it may not be possible to obtain new significant contracts in the Ukrainian market in the coming periods. In addition, the Group has for the time being cancelled contracts in Russia and Belarus.

In view of the recent events in Ukraine, threats and actions (including those of a military nature) that are difficult to foresee should be taken into account, the course of which may significantly destabilise the Group’s operations.

In the case of contracts previously performed in the East, schedules of works and expenditure have always been prepared in such a way as to minimise the risk of the Issuer’s Group related to the possible necessity of early completion of the performed works.

The Group strives to diversify its operations and seek new sources of profit. Operating in new markets entails the need to know in detail the principles of functioning in and cooperating e.g. with local authorities, institutions, and business partners A company lexpanding into a new market is usually exposed to greater operating costs (e.g. costs of promoting the company or its products) and costs of removing various barriers at the initial stage of operations.

As a result, the first periods of operations in a new market may involve greater costs or losses, and it may take longer to achieve the expected profitability. Entering a new market also entails tax risks arising from the need to get familiar with new principles and regulations characteristic for a given country.

Apart from expanding into new markets in the geographical sense, the Group introduces new products/ services in the markets in which it currently operates. Examples include activities in the property development segment, in the area of commercial investments (PRS market) and work on new products from the modular house production plant (e.g. nursing homes). As a result, there is a number of different types of risks related to launching new products on the market.

The Group strives to minimise these risks through measures such as carefully preparing for operations in a new area or cooperating with experienced partners and advisers. As a rule, such projects (depending on their scale or specific conditions) are carried out in the form of special purpose vehicles, which partially reduces the Group’s risk.

Unibep SA seeks to diversify its operations and therefore a decision was made to create a new business segment – in the energy and industrial sector. There is a risk that these projects will prove to be capital intensive and subject to early stage risks in the initial development of the segment. Underperformance of the segment may carry the risk of lower earnings for the Group.

The impact can also be reflected on the Group’s individual balance sheet items, such as an increase in receivables translating into a lower cash balance. The opening of the new energy and industrial segment is also associated with organisational changes in the Unibep Group and, consequently, the need to incur related costs.

The Group expects that engaging in activities as part of public-private partnerships (PPP) will yield economic benefits . However, we cannot rule out that the outcome of these activities will be so unfavourable that expenses will be incurred and the Group will not make efforts to be an active participant in this process. On the other hand, activities connected with developing activity as part of PPP bring risks similar to those of developing a new market or launching a new product on the market.

Entry barriers, getting familiar with market principles, operating costs – these and other aspects may give rise to the risk of lower than expected profitability of a new business. Undertaking activities as part of PPP, however, is essentially in line with the strategy of diversifying activities and ultimately reducing risks. The Group’s activities are based on several pillars, which allows reducing temporary risks and lower efficiency in particular areas.

Performance of a contract often depends on obtaining financing by the Investor, which is reflected in the contractual provisions. As a result, signing an agreement alone does not guarantee that an investment project will be implemented (or completed in its entirety).

This may lead to a loss of some of the anticipated revenues and profits. Adequate funding has been secured for the vast majority of domestic contracts currently underway. This risk also covers operations carried out on international markets. The parameters for financing transactions must now be verified more intensively.

In recent years, the Polish legal system has undergone frequent changes in regulations and produced inconsistent judicial decisions, which continues today. Attention should also be paid to the process of adapting Polish law to the requirements of the European Union and the impact of European case-law on court decisions in individual cases. It is impossible to predict the influence of changes in law, both those are currently under way and those expected to happen in the future, on the Issuer’s activities. Undoubtedly, these factors constitute a potential element of risk and may have a serious impact on the legal environment of business operations, including the Issuer’s operations. This applies in particular to the regulations governing the construction, property development and securities markets, as well as employment relations, social insurance, and the broadly-defined civil law system.

It is also possible that the catalogue of activities requiring appropriate permits or concessions may be extended. There is a risk of unfavourable changes in regulations or their interpretation in the future. This may have a negative impact on the Issuer’s operations, its market position, sales, financial performance, and development prospects.

In practice, tax authorities apply laws based not only directly on codes, but also on their interpretations by higher authorities or courts. Such interpretations also change, are replaced by other ones, or contradict each other. To some extent, this also applies to case-law. This results in uncertainty as to how the law will be applied by the tax authorities or as to the automatic application of the law in accordance with interpretations available at a given moment, which may not be in line with the various, often complex factual circumstances in business trading. The vagueness of many of the regulations that make up the Polish tax system further contributes to this risk.

On the one hand this raises doubts as to the correct application of regulations and, on the other, makes it necessary to take more account of the aforementioned interpretations. The instability in the practical application of tax laws may have a negative impact on the operations and financial position of the Issuer’s Group.