Risk management in financing

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Risk management in financing
Presented by Thilo Kusch, CFO
May 2010
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Overview Magyar Telekom Group at a glance

• Integrated operations in Hungary, Macedonia and
  Montenegro
• leading telecommunications service provider in
  all three countries
• leading SI/IT service provider in Hungary

International presence
Ukraine
Ukraine
Ukraine
Moldova
Moldova
Moldova
Hungary
Hungary
Hungary
Slovenia
Croatia

• EUR 2.5bn market capitalization
• Stock exchange listings
• listed on NYSE and Budapest Stock Exchange
• traded in London
• Majority owned by Deutsche Telekom (59.2)

Romania
Romania
Romania
Croatia
Croatia
Serbia
BiH
Serbia
Kosovo
Bulgaria
Bulgaria
Bulgaria
Montenegro
Montenegro
Montenegro
Macedonia
Macedonia
Macedonia
Albania
Albania
Greece
Integrated
Integrated
Pop/Alternative
Pop/Alternative
Pop/Alternative
Strategy
One Company
3Screen Company
ICT leadership
Service innovation
Regional presence
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Investors Expectation Free cash flow to drive
investors interest

• Different forms of free operating cash flow usage
  - capital expenditure, dividend payment, share
  buyback , MA
• Usage of free cash flow inspected thoroughly by
  the investor community
• Therefore, investors return expectations among
  primary considerations

Usage of free operating cash flow
of the generated free operating cash
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Finance strategy - Enhancing financial
flexibilityIncrease operational efficiency -gt
Create room to invest into our future
Revenues
Revenues
- Direct and operating expenses
Efficiency improvement
Less Efficiency
Revenues
/- Operating Working Capital
Room to invest
Building our future
Less room to invest
- Investments (Capex)
Dividend expectations, Aquisitions
operating Cash-flow
Stable
2010
future
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Operating Free Cash Flow Q1 2010Ebitda drop
almost compensated by Capex and oWC savings
-7,4 bn
Ebitda
66,6
59,2
-oWC
-12,0
-10,7
-Capex
-19,9
-15,5
-1,7 bn
oFcF
34,7
33,0
2009 Actual
2010 Actual
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Overview of MT financials
In supporting MTs business goals MT Finance
faces market risks
Refinancing risk
Liquidity risk

• HUF 400bn debt portfolio
• HUF 650bn annual revenue
• HUF 250bn EBITDA
• HUF 80bn free cash-flow
• HUF 70-80bn peak in annual financing need
  (dividend payment)

FX risk
Interest rate risk
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Volatile interest rates smoothened financing
cost

• Average interest rate of the debt portfolio has
  been smoothened over time not reflecting the
  prompt fluctuations in inter-bank interest rates
• controlled average maturity
• balanced fix-floater ratio
• No debtor can be independent from the market
  environment in the long run

The best goal achievable is to smoothen the
strong market fluctuations over time
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Cautious level of Sound liquidity indebtedness
position retained

• In line with Magyar Telekoms dividend policy we
  keep the net debt ratio within the range of
  30-40
• The conservative approach made possible to manage
  the financing and refinancing needs even among
  market turbulences
• Financing willingness of banks drop dramatically,
  but widespread connections with substantial
  Hungarian banks allowed us to raise necessary
  financing funds

• Maturity structure has contributed to retain a
  strong liquidity position despite lack of
  liquidity on financial market

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FX hedge strategy

• Cash-flow, PL and balance sheet cannot be hedged
  at the same time focus on cash-flow risk
  management
• Significant part of our capex is EUR denominated
• Smaller part of the opex is also exposed to HUF
  depreciation
• Exposure is mitigated by dividend incomes from
  Macedonia and Montenegro and by some operating
  revenues

Temporary fluctuations in PL (e.g. translational
effects) but no impact on CF
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Lessons learned
Responses needed from MT
Refinancing risk
Liquidity risk

• Balanced debt portfolio
• Maturity structure
• Fix-floater ratio
• Diversified financing sources
• FX denomination
• Stronger focus on cash generation
• Sufficient financing buffers to be held
• Enhanced counterparty risk valuation in investing
  transactions
• Extended horizon of risk management

FX risk
Interest rate risk