(a) Risk management relates to the understanding and active management of risks associated with all areas of the business and the associated operating environment. The Corporation’s Nova Scotia Business Fund assets are primarily exposed to credit, interest rate, market and liquidity risk.
(i) Credit risk:
Credit risk is the risk that a debtor may not pay amounts owing, thus resulting in a loss. To mitigate this risk, the Corporation has developed the following policies:
Before financing is approved, a risk assessment is performed on the client. Each application is designated a risk rating based on the industry and business, quality of management, financial history and projections, the level of other creditor involvement and shareholder participation, and environmental risks. The terms and conditions of the approved financing are reflective of the assessed risk. Applications with unacceptable levels of risk are not approved.
Clients are usually limited to a total of $15 million in financing from Nova Scotia Business Incorporated’s Nova Scotia Business Fund. Three clients currently exceed this total; two loans were approved in the Nova Scotia Business Development Corporation Fund and transferred to the Nova Scotia Business Fund via legislation on November 6, 2001. The outstanding amounts for these clients are approximately $34 million and $27 million, respectively (2008 - $36 million and $27 million).
A third client, with existing financing of $14 million (2008 - $16 million), had approximately $3 million (2008 - $4 million) of authorized, but unutilized, funding available at year-end.
The risk rating for all clients is monitored on an on-going basis. Clients identified as higher risk are further assessed at year end to determine the extent of the potential loss, taking into account the value of the security pledged in support of the financial assistance. This assessment could result in a reduction in the carrying value of the investment via the provision for credit losses.
(ii) Interest risk:
Interest rate risk is the impact future changes of interest rates have on cash flows and fair value of assets and liabilities. To mitigate this risk, the Corporation matches the repayment timing of amounts borrowed with the repayment timing of financing advanced as closely as practical.
(iii) Market risk:
Market risk is the risk that the value of an investment will fluctuate as a result of changes in market prices, whether those changes are caused by factors specific to the individual financial instrument, its issuer or factors affecting all similar financial instruments traded in the market. At year end, the Corporation held $1,575 (2008 - $3,888) in publicly traded equities.
(iv) Liquidity risk:
Liquidity risk is the risk of not being able to meet the Corporation’s cash requirements in a timely and cost effective manner. Liquidity requirements are managed through the receipt of provincial grants, income generated from the loans receivable and equity investments, and principal repayments received on the loans receivable. The sources of funds are used to pay operating expenses and interest and principal payments to the Province of Nova Scotia. In the normal course of business the Corporation enters into contracts that give rise to commitments for future payments which may also impact the Corporation’s liquidity.
(b) Capital:
The Corporation carries out its programs in conjunction with the budget funding allocated to it by the Province of Nova Scotia. During the year, the long-term debt decreased by $6,500.