7.5. Investments in the FIZ asset portfolio

Financial assets held in the FIZ investment portfolio are classified as:

• financial assets measured at fair value through profit or loss,
• financial assets measured at amortized cost.

Financial assets measured at amortized cost include those assets that meet the SPPI test and are held for the purpose of collecting the principal and interest; these include mainly: cash and bank deposits.

In the FIZ portfolio, the Group does not hold debt instruments measured at fair value through other comprehensive income (i.e. assets meeting the SPPI test and held for the purpose of collecting the principal and interest and for sale).

All other assets in the FIZ portfolio are classified as “measured at fair value through profit or loss”.

In respect of financial assets measured at amortized cost, impairment losses are calculated using the model of expected credit losses The group applies a three-stage impairment model:

• Stage 1 – balance positions for which credit risk has not increased significantly since initial recognition. Moreover, Stage 1 also includes financial assets with high credit quality (investment grade). Expected credit losses are calculated based on the probability of default within 12 months (i.e. total expected credit loss is multiplied by the probability that such loss occurs within the next 12 months);
• Stage 2 – balance positions for which has increased significantly since initial recognition, but there is no objective evidence of impairment; expected credit losses are determined based on the probability of default for the entire lifetime of the asset;
• Stage 3 – balance positions with an objective indication of impairment.

For financial assets measured at amortized cost, interest income is calculated using the effective interest rate method and recognized in the “other net gains/losses” line item.

A gain or loss on the fair value measurement of investments is recognized in the financial result and presented in the “other net gains/losses” line item in the period in which it occurred.

All the investments held in the FIZ portfolio were classified as long-term assets, because the Parent Company does not intend to use these assets in the short term and these assets are not used to ensure current liquidity, but rather constitute a long-term deposit.

One of the important actions that the Parent Company took to prevent potential threats related to the deterioration of liquidity, was the establishment of the Closed-End Investment Fund (“FIZ”). As at the balance sheet date, JSW holds 100% of FIZ certificates and consolidates the FIZ by the full method. The Fund has been established for a specific term until 30 December 2024 with an option of extending its term of operation by no more than three years. In periods of upswing on the coal markets, JSW intends to transfer a portion of its cash surpluses to FIZ to have them invested. The Company will be able to use the funds accumulated in FIZ in periods of market downturn and/or in periods of negative cash flows generated by JSW. In parallel, these funds will offer financial support for long-term and medium-term expense planning associated with the execution of investment projects of strategic importance for JSW and the Group aimed at, among other objectives, the expansion of mining capacity, improved access to deposits, coal preparation and coke production.

On 18 January 2018, the JSW Extraordinary Shareholder Meeting gave consent for JSW to acquire series A investment certificates, constituting the entire issue of those certificates, from the issuer, i.e. JSW Stabilization Closed-End Investment Fund for PLN 1.5 billion. The Fund subscribes to a conservative investment policy. Its only business is investment of funds accumulated through private offerings of Investment Certificates in very secure liquid assets specified in the Articles of Association, including primarily State Treasury bonds and other treasury and banking debt instruments for which the applicable exposure limit has been strictly defined in the Fund’s investment policy. The Fund has been entered in the register pursuant to the decision of 26 January 2018. The fund is managed by Towarzystwo Funduszy Inwestycyjnych Energia S.A. On 6 February 2018, the Fund commenced its investment operations by way of the Investment Committee of TFI Energia making the first investment decision on the allocation of the Fund’s assets.

On 7 December 2018, the JSW Extraordinary Shareholder Meeting gave consent for JSW to acquire series B investment certificates and investment certificates of further series issued by JSW Stabilization FIZ. On 17 December 2018, the issue of Series B Investment Certificates for the amount of PLN 300.0 million was completed. The funds were added to the investment sub-portfolio and are earmarked to secure cash designated for as equity in the financing structure for the capital expenditures planned in the long-term and medium-term associated with the execution of investment projects of strategic importance for JSW and the Group.

The carrying amount of investments in the FIZ asset portfolio as at 31 December 2018 was PLN 1,826.1 million.

The Group has been investing in a portfolio of financial assets through the Fund in which the Parent Company holds 100% outstanding investment certificates. All the investments held in FIZ were classified as long-term assets, because the Parent Company does not intend to use these assets in the short term and these assets are not used to ensure current liquidity, but rather constitute a long-term deposit.

The Fund may invest its assets in:

• debt securities,
• money market instruments,
• currencies,
• derivatives, including non-standardized derivatives, provided that they are negotiable,
• deposits in banks.

The basic criterion for selecting the investments is the possibility of earning as high as possible rate of return, while minimizing the risk associated with the issuer’s insolvency, interest rate volatility and limited liquidity risk.

Rules for diversifying investments:

1. Money market securities or instruments issued by a single entity, accounts receivable from that entity and participations in that entity cannot constitute a total of more than 20% (twenty percent) of the Fund’s asset value. The limitation does not apply to securities issued, guaranteed or secured by the State Treasury, the National Bank of Poland, OECD member states or any international financial institutions of which the Republic of Poland is a member or at least one of the OECD member states.
2. Bonds guaranteed or secured by the State Treasury may represent up to 100% of the Fund’s asset value.
3. Deposits in a single domestic bank, foreign bank or credit institution must not account for more than 20% of the Fund’s Asset value.
4. Currency exposure – construed as the total value of investments in foreign currencies and other types of investment denominated in foreign currencies, must not exceed 10% of the Fund’s net asset value.
5. Corporate bonds or local government bonds will jointly account for no more than 10% of the Fund’s net asset value, while bonds issued by a single entity must not represent more than 1% of the Fund’s net asset value.
6. Debt securities and money market instruments issued by banks will jointly account for no more than 25% of the Fund’s net asset value, it being understood that, for the purposes of application of this limit, debt securities and money market instruments issued by Bank Gospodarstwa Krajowego will not be classified as debt securities or money market instruments issued by banks. The share of a single issuer must not exceed 5% of the net asset value (while for covered bonds the share of a single issuer must not exceed 10% of the net asset value).
7. Debt securities and money market instruments issued by Bank Gospodarstwa Krajowego, save for securities guaranteed or secured by the State Treasury of the Republic of Poland, will account for no more than 10% of the net asset value.

The following table presents the structure of the Fund’s assets at the end of the reporting period.

For financial assets measured at fair value through profit or loss (debt securities, covered bonds), there is no active market and in their case the Group also cannot apply the valuation techniques resulting in reliable values. Accordingly, the value received from the Fund’s manager based on information received from the custodian is deemed to be its fair value.

In the case of financial assets measured at amortized cost (i.e. deposits and cash and cash equivalents), the Group classifies them as Stage 1 in terms of impairment because of the high rating of their credit quality and the potential impairment allowance is not significant and it was not recognized.

The table does not include the Fund’s liabilities resulting from the valuation of derivatives; therefore it does not reconcile with the table presenting the structure of the Fund’s assets at the end of the reporting period.

Significant concentration of credit risk is 10% of the issuer’s share in total assets.