PARTNER COMMUNICATIONS CO LTD | CIK:0001096691 |

NOTE 6 – FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT

a.

Financial risk factors

The Group is exposed to a variety of financial risks: credit, liquidity and market risks as part of its normal course of business. The Group's risk management objective is to monitor risks and minimize the possible influence that results from this exposure, according to its evaluations and expectations of the parameters that affect the risks.

1.

Risk Management

Risk management is carried out by the financial division under policies and/or directions resolved and approved by the audit committee and the board of directors.

2.

Market risks

(a)

Description of market risks

The Group is exposed to fluctuations in the Israeli Consumer Price index (CPI) notes payable which are linked to the CPI. The Group did not enter into CPI hedging transactions in 2015, 2016 and 2017.

Furthermore, the Group's notes payable bearing variable interest rate cause cash flow risks. Based on simulations performed, an increase (decrease) of 1% interest rates during 2017 in respect of the abovementioned financial instruments would have resulted in an annual increase (decrease) in interest expenses of NIS 5 million. The Group does not enter into interest rate hedging transactions.

The Group's operating income and cash flows are exposed to currency risk, mainly due to trade receivables and trade payables denominated in USD. The Group did not enter into free standing forward transactions in 2015, 2016 and 2017.

Data regarding the US Dollar and Euro exchange rate and the Israeli CPI:

 

		Exchange				Exchange
		rate of one				rate of one				Israeli
		Dollar				Euro				CPI*
At December 31:
2017			NIS 3.467				NIS 4.153			221.57 points
2016			NIS 3.845				NIS 4.044			220.68 points
2015			NIS 3.902				NIS 4.247			221.13 points
Increase (decrease) during the year:
2017			(9.8	)%			2.7	%			0.4	%
2016			(1.5	)%			(4.8	)%			(0.2	)%
2015			0.3	%			(10.1	)%			(1.0	)%

* Index for each reporting period's last month, on the basis of 1993 average = 100 points.

 

Sensitivity analysis:

An increase (decrease) of 2% in the CPI as at December 31, 2015, 2016 and 2017 would have decreased (increased) equity and profit by NIS 20 million, NIS 9 million, and NIS 3 million, for the years ended December 31, 2015, 2016, 2017 respectively, assuming all other variables remain constant.

An increase (decrease) of 5% in the USD exchange rate as at December 31, 2015, 2016 and 2017 would have decreased (increased) equity and profit by NIS 5 million, NIS 3 million, and NIS 3 million, for the years ended December 31, 2015, 2016, 2017 respectively, assuming that all other variables remain constant.

(b)

Analysis of linkage terms of financial instruments balances

		December 31, 2017
		In or linked to USD				In or linked to other foreign currencies (mainly EURO)				NIS linked to CPI				NIS unlinked				Total
		New Israeli Shekels in millions
Current assets
Cash and cash equivalents			2				4								861				867
Short term deposits															150				150
Trade receivables*			62				34								712				808
Other receivables															9				9
Non- current assets
Trade receivables															232				232
Total assets			64				38								1,964				2,066
Current liabilities
Current maturities of notes payable and borrowings											213				491				704
Trade payables*			143				32								612				787
Payables in respect of employees															78				78
Other payables															21				21
Non- current liabilities
Notes payable															972				972
Borrowings from banks and others															243				243
Total liabilities			143				32				213				2,417				2,805

		In or linked to foreign currencies
		New Israeli Shekels in millions
*Accounts that were set-off under enforceable netting arrangements
Trade receivables gross amounts			281
Set-off			(185	)
Trade receivables, net			96
Trade payables gross amounts			360
Set-off			(185	)
Trade payables, net			175

		December 31, 2016
		In or linked to USD				In or linked to other foreign currencies (mainly EURO)				NIS linked to CPI				NIS unlinked				Total
		New Israeli Shekels in millions
Current assets
Cash and cash equivalents			2				1								713				716
Short term deposits															452				452
Trade receivables*			58				35								897				990
Other receivables															39				39
Non- current assets
Trade receivables															333				333
Total assets			60				36								2,434				2,530
Current liabilities
Current maturities of notes payable and borrowings											212				287				499
Trade payables*			132				19								530				681
Payables in respect of employees															90				90
Other payables															10				10
Non- current liabilities
Notes payable											212				437				649
Borrowings from banks and others											197				1,353				1,550
Total liabilities			132				19				621				2,707				3,479

		In or linked to foreign currencies
		New Israeli Shekels in millions
*Accounts that were set-off under enforceable netting arrangements
Trade receivables gross amounts			267
Set-off			(174	)
Trade receivables, net			93
Trade payables gross amounts			325
Set-off			(174	)
Trade payables, net			151

 

(c)

Details regarding the derivative financial instruments

The notional amounts of derivatives as of December 31, 2016 and 2017 are as follows, based on the amounts of currencies to be received, translated into NIS at the exchange rates prevailing at each of the reporting dates, respectively:

		New Israeli Shekels
		December 31
		2016				2017
		In millions
Embedded derivatives pay USD, receive NIS			11				3

3.

Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group's trade receivables, and also from cash and cash equivalents and other receivables. Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. The Group conducts credit evaluations on receivables of certain types over a certain amount, and requires collaterals against them. Accordingly, the financial statements include appropriate allowances for estimated irrecoverable amounts. See also note 2(j)(2).

The face amount of financial assets represents the maximum credit exposure, see note 6(c).

The cash and cash equivalents are held in leading Israeli commercial banks, rated by Standard & Poor's Maalot at between ilAA+/Stable to ilAAA/stable.

The trade receivables are significantly widespread, and include individuals and businesses, and therefore have no representing credit rating.

See also note 7 as to the assessment by aging of the trade receivables and related allowance for doubtful accounts.

a.

Financial risk factors (continued)

4.

Liquidity risk

 

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, without incurring unacceptable losses or risking damage to the Group's reputation. The Group's policy is to ensure that it has sufficient cash and cash equivalents to meet expected operational expenses and financial obligations.

Maturities of financial liabilities as of December 31, 2017:

		2018				2019				2020				2021 to 2022				2023 to 2024				Total
		New Israeli Shekels in millions
Principal payments of long term indebtedness:
Notes payable series C (1)			213																				213
Notes payable series D			109				109				109				110								437
Notes payable series F											129				258				257				644
Borrowing K (2)			75																				75
Borrowing L (3)			200																				200
Borrowing O (3)			100																				100
Borrowing P			7				29				29				60								125
Borrowing Q							23				23				45				34				125
Expected interest payments of
long term borrowings and notes payables (1) (2)			68				23				19				23				7				140
Trade and other payables			865																				865
Total			1,637				184				309				496				298				2,924
Add offering expenses and discounts and premiums																							4
																							2,928

(1)   Linked to the CPI as of December 31, 2017.

(2)   The Company intends to early repay the borrowings in 2018.(see note 15 (5)).

(3)  The Company early repaid the borrowings in March 2018 (see note 15(5)).

See note 15 in respect of borrowings and notes payable.

b.

Capital risk management

Credit rating: According to Standard & Poor's Maalot ("S&P Maalot") credit rating, of July 27, 2017, the Company's ilA+/Stable credit rating was unchanged.

See note 15(7) regarding financial covenants.

 

As detailed in note 2(j) the financial instruments are categorized as following:

 

Fair Value through Profit or Loss (FVTPL); Loans and Receivables (L&R); Amortized Cost (AC). The financial instruments that are categorized FVTPL are derivative financial instruments. Their fair values are calculated by discounting estimated future cash flows based on the terms and maturity of each contract and using forward rates for a similar instrument at the measurement date. All significant inputs in this technique are observable market data and rely as little as possible on entity specific estimates – this method matches the "Level 2" fair value measurement level hierarchy. There were no transfers between fair value levels during the year. Carrying amounts and fair values of financial assets and liabilities, and their categories:

 

			December 31, 2016												December 31, 2017
	Category		Carrying amount				Fair value				Interest rate used (**)				Carrying amount				Fair value				Interest rate used (**)
			New Israeli Shekels in millions
Assets
Cash and cash equivalents	L&R			716				716								867				867
Short term deposits	L&R			452				452								150				150
Trade receivables	L&R			1,323				1,318				4.72	%			1,040				1,040				4.47	%
Other receivables (*)	L&R			9				9								9				9
Liabilities
Notes payable series C	AC			423				440			Market quote					213				219			Market quote
Notes payable series D	AC			543				548			Market quote					435				443			Market quote
Notes payable series E	AC			121				127			Market quote
Notes payable series F	AC															650				659			Market quote
Trade and other payables (*)	AC			771				771								865				865
Borrowing C	AC			75				81				3.43	%
Borrowing D	AC			75				81				3.43	%
Borrowing E (*)	AC			152				152
Borrowing F	AC			197				199				3.17	%
Borrowing G	AC			100				98				3.85	%
Borrowing H	AC			100				97				3.85	%
Borrowing I	AC			120				120				3.43	%
Borrowing J	AC			62				62				3.23	%
Borrowing K	AC			76				76				3.43	%			75				75				3.71	%
Borrowing L	AC			200				204				3.98	%			200				200				4.25	%
Borrowing M	AC			200				201				3.85	%
Borrowing N	AC			250				260				3.67	%
Borrowing O	AC															100				110				4.34	%
Borrowing P	AC															125				125				2.38	%
Borrowing Q	AC															125				125				2.5	%
Interest payable (*)	AC			9				9								21				21
Derivative financial instruments	FVTPL
	Level 2			*				*								*				*

 

(*)

The fair value of these financial instruments equals their carrying amounts, as the impact of discounting is not significant.

(**)

The fair values of the notes payable quoted market prices at the end of the reporting period are within level 1 of the fair value hierarchy. The fair values of other instruments under AC categories were calculated based on observable weighted average of interest rates derived from quoted market prices of the Group's notes payable and bank quotes of rates of similar terms and nature, are within level 2 of the fair value hierarchy.

 

See also note 15 in respect of borrowings and notes payable.