Strategy and Risk Management

Financial risks

The Group, by nature of its business and geographical positioning, is exposed to financial risks. The Group’s overall risk management program focuses on financial market fluctuations and aims to minimize the potentially unfavorable impact 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.  As of 31December 2012, the ratio of the Group’s committed long term unutilized facilities and cash over short-term debt stood at 4.89 times.

The Parent Company is registered and the Group undertakes part of its activities in a Eurozone country under an Economic Adjustment and Structural Reforms Program. If the Program fails or is aborted, the Group will face additional liquidity risks. To counter such risks, the Group maintains adequate liquidity reserves so as to be able to address any disturbances inflicted upon its cash flows.

Interest rate risk

37% of total Group debt is based on fixed, pre-agreed interest rates and an additional 15% of floating interest rate debt has been swapped to fixed, via floating to fixed interest rate swaps.  The impact therefore of interest rate volatility to the Income Statement and Cash Flow is limited, as illustrated by the following sensitivity analysis:

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 minimize the relevant risk and to shift the fixed to floating ratio of the Group’s borrowings, if that is considered necessary. As at 31 December 2012, the Group had €130 million of floating interest rate debt swapped to fixed with an average duration of 2 years and at an average interest rate of 2.41%, part of which (€100 million notional) has been designated as a cash flow hedge. 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 (FX) 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 policies approved by the Board of Directors at regular intervals.

FX risks are managed using natural hedges, FX options and FX forwards. Borrowings are denominated in the same currency as the assets that are being financed (where feasible), thereby 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 and U.S.  dollars in Turkey, in euro in Albania, and in euro and in yen in Egypt. This issue is re-examined at regular intervals.

The yen financing in Egypt nevertheless has been hedged via FX forwards in U.S. dollar/yen, that are rolled on a semi-annual basis and are executed on behalf of the Group’s subsidiary Iapetos Ltd.

Also, Group company TITAN Global Finance plc. granted loans equal to €100 million in 2009 and €53.5 million in the first half of 2012, to another Group company Titan America LLC. Subsequently, Titan America LLC hedged the loan principal via FX forward contracts

The following table demonstrates the sensitivity of the Group’s profit before tax and the Group’s equity to reasonable changes in the U.S. dollar, Serbian dinar, Egyptian pound, British pound, Turkish lira and Albanian lek floating exchange rates, with all other variables held constant:

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 of 31 December 2012, 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.

Operational risks

Risks arising from the climate and natural disasters:

The Group operates in countries and areas such as Greece, Egypt, Turkey and Florida in the U.S.A. that are exposed to risks arising from natural (climatic and geological) phenomena, such as typhoons, sand storms, earthquakes etc. Amongst the measures adopted by the Group to avert the disastrous consequences of such phenomena is the adoption of design standards that are more stringent than those prescribed by relevant legislation. Additionally, the Group has in place emergency plans which aim at safeguarding its industrial infrastructure and the protection of human life among its personnel.

Risks associated with production cost:

The consumption of thermal energy, electricity and raw materials constitute the most important elements of the Group’s cost base. The fluctuation in the price of fossil fuels poses a risk which greatly affects the cost of production.

In order to mitigate the effects of such a risk, the Group invests, and will continue to do so, in low energy-requirement equipment and in the replacement of fossil fuels by alternative fuels.

Ensuring access to the required quality and quantity of raw materials is, after all, an additional priority taken into account when planning new investments.

With respect to existing units, the Group ensures the adequate supply of raw materials for the duration of the life of its industrial units.

The Group will also continue to invest in the use of alternative raw materials in order to gradually lessen its dependence on natural raw materials. To this end, the Group has set specific quantifiable targets for the substitution of natural raw materials by alternative raw materials, such as natural waste, and is closely monitoring the evolution of this activity.