< Risks and Uncertainties
Financial Risks
Group operations give rise to various financial risks including foreign exchange and interest rate risks, credit risks and liquidity risks. The Group’s overall risk management programme focuses on financial market fluctuations and aims to minimise the potential unfavourable impacts of those fluctuations on its financial performance. The Group does not engage in speculative transactions or transactions which are not related to its commercial, investing or borrowing activities.
Liquidity Risk:
Liquidity is managed by employing a suitable mix of liquid cash assets and long term committed bank credit facilities. The Group monitors the ratio of unutilized long term committed bank credit facilities and immediately available cash over short term debt on a monthly basis. At year-end 2011, the ratio of the Group’s committed long term unutilised facilities and cash over short term debt stood at 3.2 times.
Interest rate risk:
Given that 22% of total Group debt is based on fixed, pre-agreed interest rates and an additional 61% is based on pre-agreed interest rate spreads, the impact of money supply volatility on Group P&L and cash flow is small, as is illustrated in the sensitivity analysis on the following page.
Sensitivity analysis of Group’s borrowings
due to interest rate changes
| (all amounts in Euro thousands) |
Interest rate variation |
Effect on profit before tax | |
| Year ended 31 December 2011 | EUR |
1.0% -1.0% |
-5,261 5,261 |
| USD |
1.0% -1.0% |
-2,236 2,236 | |
| GBP |
1.0% -1.0% |
- - | |
| BGN |
1.0% -1.0% |
-345 345 | |
| EGP |
1.0% -1.0% |
- - | |
| ALL |
1.0% -1.0% |
-330 330 | |
| Year ended 31 December 2010 | EUR |
1.0% -1.0% |
-3,932 3,932 |
| USD |
1.0% -1.0% |
-1,890 1,890 | |
| GBP |
1.0% -1.0% |
- - | |
| BGN |
1.0% -1.0% |
-270 270 | |
| EGP |
1.0% -1.0% |
- - | |
| ALL |
1.0% -1.0% |
-40 40 |
Note: Table above excludes the positive impact of interest received from deposits.
The ratio of fixed to floating rates of the Group’s net borrowings is determined by market conditions, Group strategy and financing requirements. Occasionally interest rate derivatives may also be used, but solely to ameliorate the relevant risk and to shift the ratio of fixed/floating rates, if that is considered necessary. As at 31st December 2011, the Group had €130m of floating interest rate debt swapped to fixed with an average duration of 2.9 years and at an average interest rate of 2.41%, part of which (€100 m notional) has been designated as cash flow hedge. If the interest rate swap position is included in fixed rate borrowings calculation, the portion of fixed rate debt accounts to 35% of total borrowings.
According to Group policy, interest rate trends and the duration of the Group’s financing needs are monitored on a forward looking basis. Consequently, decisions about the duration and the mix between fixed and floating rate debt are taken on an ad-hoc basis. As a result, all short-term loans have been concluded with floating rates. Medium to long-term loans have been concluded partly with fixed and partly with floating rates.
Foreign Currency risk:
Group exposure to exchange rate risk derives primarily from existing or expected cash flows denominated in currencies other than the Euro (imports / exports) and from international investments. This risk is addressed in the context of approved policies.
FX risks are managed using natural hedges and FX forwards. Βorrowings are denominated in the same currency as the assets that are being financed (where feasible), therefore creating a natural hedge for investments in foreign subsidiaries whose equity is exposed to FX conversion risk. Thus, the FX risk for the equity of Group subsidiaries in the U.S.A. is partially hedged by concluding dollar-denominated loans.
Exceptions to this are Turkey, Egypt and Albania, where Group investments are in Turkish Liras, Egyptian Pounds and Albanian Lek, whereas part of the financing is in Euro in Turkey and Albania, and in Euro and in Yen in Egypt. The Group has decided that the cost of refinancing its liabilities from Euro to Turkish Liras and from Yen to Egyptian Pounds is not financially attractive for the time being. This issue is re-examined at regular intervals. As regards the Euro loan granted by Titan Global Finance Plc to Titan America LLC, the loan principal has been hedged via FX forward contracts for the same amount and tenor so that FX gains/ losses on the revaluation of the principal, do not impact Titan America LLC and Consolidated P&L. The sensitivity analysis to FX fluctuations of pre-tax profit and net assets is provided to the following table:
Sensitivity analysis in foreign exchange rate changes
| (all amounts in Euro thousands) | Foreign Currency |
Increase/ Decrease of Foreign Currency vs. € |
Effect on Profit Before Tax |
Effect on equity |
| Year ended 31 December 2011 | USD |
5% -5% |
-4,734 4,283 |
26,749 -24,201 |
| RSD |
5% -5% |
772 -698 |
2,410 -2,180 | |
| EGP |
5% -5% |
6,558 -5,934 |
44,228 -40,016 | |
| GBP |
5% -5% |
34 -31 |
170 -153 | |
| TRY |
5% -5% |
58 -52 |
979 -885 | |
| ALL |
5% -5% |
-374 338 |
1,852 -1,675 | |
| Year ended 31 December 2010 | USD |
5% -5% |
-4,291 3,882 |
30,141 -27,270 |
| RSD |
5% -5% |
1,010 -913 |
2,393 -2,165 | |
| EGP |
5% -5% |
6,065 -5,487 |
45,253 -40,943 | |
| GBP |
5% -5% |
- - |
140 -127 | |
| TRY |
5% -5% |
269 -244 |
1,099 -994 | |
| ALL |
5% -5% |
-3 3 |
2,334 -2,111 |
Note: a) Calculation of "Effect on Profit before tax" is based on year average FX rates; calculation of "Effect on Equity" is based on year end FX rate changes
b) The above sensitivity analysis is used on floating currencies and not on fixed.
Credit risk:
The Group is not exposed to major credit risks. Customer receivables primarily come from a large, widespread customer base. The financial status of customers is constantly monitored by Group companies.
When considered necessary, additional collateral is requested to secure credit. Provisions for impairment losses are made for special credit risks. As at year-end 2011, it is deemed that there are no significant credit risks which are not already covered by insurance as a guarantee for the credit extended or by a provision for doubtful receivables.
Credit risk arising from counterparties’ inability to meet their obligations towards the Group as regards cash and cash equivalents, investments and derivatives, is mitigated by pre-set limits on the degree of exposure to each individual financial institution. These pre-set limits are part of Group policies that are approved by the Board of Directors and monitored on a regular basis.