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Financial policy and rating

In the first half of 2012 financial markets continued to feature a high degree of uncertainty in terms of the solidity and stability of the Eurozone financial system, which continued to be very turbulent and volatile. In spite of the downward levelling off of market curves, a rapid fall in credit spreads was recorded and an increase in bank lending costs.

This phenomenon was immediately overturned for the financial conditions of companies and mainly for those which operate in countries where sovereign risk is high.

Against this background, the Group continued to pursue its goal of maintaining an adequate balance, between assets and liabilities, with the utilisation of capital consistent with sources of funding, in terms of both the repayment schedule and methods and taking into account the need to refinance the current loan structure and corporate transactions and, identifying the optimum mix of financing between fixed and variable rate, under the scope of a prudent strategy towards rate fluctuation risk, which is designed to stabilise financial flows in order to guarantee margins and cash flows.

In order to strengthen the financial structure further and support its business plan, the Group has agreed new medium/long-term financing of €327.5 million, partly used for restructuring the €70 million RBS put loan and partly used for adequately financing its investment plan. Specifically, a significant portion was provided in June through an EIB (European Investment Bank) loan of €125 million, for investments for upgrading and expanding the gas and electricity distribution networks, with a 15-year amortisation schedule, at the six-month Euribor plus a 1.46% spread. Note also the bond issue of €102.5 million which took place on 14 May 2012 and featured particularly long terms of 15 and 20 years at a fixed rate of 5.25%.

Given the current market situation, in order to keep liquidity risk indexes stable, the Group has taken out further committed credit facilities of €170 million for a term of 2-3 years as well as renewing those which expire in the first half of 2012, making a total for these credit facilities of €420 million.

The Group’s financial management is based mainly on the principle of risk mitigation, adopting a hedging policy which does not include recourse to speculative derivative instruments.

The policies and principles for management and control of the risks inherent in the Group’s financial operations, such as liquidity risk and related default and covenant 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, trade receivables, etc.) are not considered, while financial liabilities are reflected in principal and interest, trade payables and interest rate derivative contracts. Call credit facilities have matured when they become due, while other financing has been allowed to mature on the date on which repayment can be requested (put bonds are considered to be repaid on the first date the put option can be exercised, even if, given the current market situation, it is out of the money).

Worst Case Scenario 30/06/201231/12/2011
(€ million) from 1
to 3 months
between 3 months
and 1 year
from 1
to 2 years
from 1
to 3 months
between 3 months
and 1 year
from 1
to 2 years
Payables and other financial liabilities4211411415318046
Payables to suppliers1,011001,22900

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

In order to guarantee sufficient liquidity to cover all its financial commitments, over the next two years at least (the worst case scenario time horizon given), as at 30 June 2012, the Group has €507 million in cash, €420 million in unused committed credit facilities and ample space on its uncommitted credit facilities (€1,000 million).

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

At 30 June 2012, long-term debt accounted for 98% of the Group’s total financial debt. The average maturity is around nine years and 57% 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 after five years is shown below.

Debt nominal flow (€mln) 30/06/2012 31/12/2013 31/12/2014 31/12/2015 31/12/2016Over 5 yearsTotal
Convertible bonds01400000140
Put Bond / Loan00000520520
Bank debt / other payables48865223533177630
Gross financial debt*  48226522355331,5492,643

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

Default risk and loan covenants

The risk lies in the possibility that loan agreements signed contain clauses that include the right of the financing entity to ask for the early repayment of the loan if certain conditions occur thereby creating a potential liquidity risk.

At 30 June 2012 a significant proportion of the Group’s net financial position is represented by loan agreements which include a collection of clauses, in line with international practice, which impose a series of prohibitions. The main ones are pari passu, negative pledge and change of control clauses. In relation to mandatory early repayment clauses, there are no financial covenants on the debt, with the exception of the restriction on certain loans (€220 million), of the corporate rating by only one ratings 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, various types of short-term credit facilities 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 financial charges.

At 30 June 2012, the exposure to the risk of adverse interest rates changes, with a resulting negative impact on cash flows, was 37% of total gross financial debt. The remaining 63% was made up of medium/long-term fixed-rate loans, exposing the Group to the risk of change in fair value hedged by derivative financial instruments.

The application of the risk rate management policy is translated, from time to time, according to market conditions, into a combination of fixed-rated, variable-rate and hedging financial instruments using derivatives.

Derivatives are 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 variable rates as part of a prudential approach towards the risk of interest rate fluctuations. Interest rate risk is essentially managed with a view to stabilising financial flows in order to protect margins and guarantee cash flow from operations.

Gross financial debt (*) 30/06/1231/12/2011
(€ million) without derivativeswith derivatives% with derivativeswithout derivativeswith derivatives% with derivatives
fixed rate1920163863%1889162069%
variable rate723100537%56383231%

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

Exchange rate risk not related to commodity risk

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

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


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

In the first half of 2012, 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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