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Financial Policy and Rating

The aim of the Group's financial operations is to maintain an adequate balance, now and in the future, between the investment and employment of capital on one hand and sources of funding on the other, in terms of both the repayment schedule and the types of rate.

The policies and principles for management and control of the risks inherent in the Group's financial operations, such as liquidity risk, interest rate risk and exchange rate risk, are described below.

Liquidity risk – Credit rating

Liquidity risk is defined as the risk whereby, due to its inability to raise new funds or liquidate assets in the market, a company fails to meet its payment obligations.

The following table represents the “worst case scenario” where assets (cash, receivables, etc.) are not considered, while financial liabilities are reflected in principal and interest, trade payables and interest rate derivative contracts. Revocable lines of credit expire at sight, while other funding expires at the first payment date on which repayment may be requested (put bonds are considered repaid on first exercise date of the put).

Worst case31 December 201131 December 2010
(€ millions)From 1 to 3 monthsfrom 3 months to 1 yearFrom 1 to 2 yearsFrom 1 to 3 monthsfrom 3 months to 1 yearFrom 1 to 2 years
Bonds 30.4 501.7 221.2 27.9 244.8 415.0
Loans and other financial liabilities 153.2180.0 46.4 69.8 61.2 45.3
Due to suppliers1,229.20.00.0 1,061.00.00.0
Total1,4136822681,159306460

The Group’s aim is to ensure a level of liquidity which allows it to meet its contractual commitments both under normal business conditions and during a crisis, by maintaining available lines of credit and liquidity and proceeding with the timely negotiation of loans approaching maturity, optimising the cost of funding according to current and future market conditions.

Compared with its short-term financial debt at 31 December 2011, the Group has €415 million in cash, €280 million in unutilised committed lines of credit and ample space in its uncommitted lines of credit (more than €1,100 million), giving it sufficient liquidity to cover any financial commitments for the next two years at least.

The lines of credit and related financial assets are not concentrated with any one lender but are distributed equally among leading Italian and international banks, with utilisation much lower than the total amount available.

As regards the medium- to long-term debt profile, €50 million due in 2031 was drawn down under the Put Bonds facility on 10 October 2011.

At 31 December 2011, the Group had put in place a debt profile where long-term debt accounted for 98% of its total financial liabilities. The average maturity is around nine years and 59% of the debt has a repayment date longer than five years.

The projected nominal flow based on the annual repayment dates over the next five years and the portion longer than five years is shown below.

Nominal negative cash flow
(€ millions)  
31 December 201231 December 201331 December 201431 December 201531 December 2016 Beyond 5 yearsTotal
Bonds0000 500 7501,250
Convertible bonds01400000140
Put Bond / Loan00000590590
Due to banks / to others13134292032154473
Gross financial debt 131174292035211,3942,452

There are no financial covenants on the debt, except – in the case of certain financings – for a restriction against the rating of even one Rating Agency falling below “Investment Grade” level (BBB-).

Interest rate risk

The Group uses external funding sources in the form of medium- to long-term financial debt, banking credit lines of different types and invests its available cash primarily in immediately realisable highly liquid money market instruments. Changes in market levels of interest rates affect both the financial costs associated with different types of financing technique and the revenue from different types of liquidity investment, causing an impact on the Group’s cash flows and net interest costs.

At 31 December 2011, the exposure to the risk of adverse interest rates changes, with a resulting negative impact on cash flows, was 31% of total gross financial debt.

Gross financial indebtedness
(*)
31 December 201131 December 2010
(€ millions)without derivativeswith derivatives% with derivativeswithout derivativeswith derivatives% with derivatives
fixed rate1,889.41,620.4 69%1,819.8 1,665.5 69%
floating rate 562.9 831.9 31% 588.5 742.8 31%
Total2,4522,452100%2,4082,408100%

* Gross financial debt does not include cash, and other current and non-current receivables

The derivatives are perfectly matched to the underlying debt and are in accordance with IAS standards.

The Group’s hedging policy does not allow the use of instruments for speculative purposes and is aimed at optimising the choice between fixed and floating rates as part of a prudential approach towards the risk of fluctuations in interest rates. Interest rate risk is managed essentially with a view to stabilising financial flows in order to protect margins and guarantee the cash flows arising from normal operations.

During 2011 and despite its strong weighting in long-term debt (about 98%), the Group managed to maintain the cost of debt at an overall average of around 4.4%.

Exchange rate risk not related to commodity risk

The Group adopts a conservative approach to currency risk exposure, in which all currency positions are netted or hedged using derivative instruments (cross-currency swaps).

The Group currently has a foreign currency bond of JPY 20 billion, fully hedged with a cross-currency swap.

Rating

Hera S.p.A. has long-term ratings of “Baa1 Negative Outlook” from Moody’s and “BBB+ Stable Outlook” from Standard & Poor’s.

In 2011, Standard & Poor’s confirmed its rating of “BBB+ Stable Outlook”.

On 25 January 2012, however, Moody's revised its rating on Hera Group’s long-term debt from “A3 Stable Outlook” to “Baa1 Negative Outlook”. The main reason for the negative outlook was the deterioration in Italy’s macroeconomic position and uncertainty on the outlook for Italy.

Given the current environment, the measures and strategies of the Plan aimed at ensuring the maintenance/improvement of satisfactory rating levels have been strengthened further.

 
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