management
Risk management
Credit risk:
The Group is exposed to the credit risk affecting the shipping industry: an activity towards a limited number of clients, usually major companies or shipping operators. This risk is, however, significantly reduced by our standard payment rules (in advance for time charter hire and within completion of discharge for spot voyages) and by the large availability of information on clients’ credit standing.
Receivables are monitored at all times and, when necessary, impairment losses are recognised, based on historical experience and on information available on customers’ standing.
At the account-closing date (excluding the credit towards ENI Australia described below), about 3.9% of receivables had been due for over one year. Of these, the majority consisted of demurrage and other charges, usually requiring a longer period for agreement and settlement.
Please also note that the net receivables stated on the financial statements also include insurance reimbursements yet to be liquidated for approximately € 0.6 million at 31.12.2012. In this regard, it is specified that the receivables relating to previous events Four Rainbow reported in the same section of the consolidated financial statements of FY 2011 were entirely collected in 2012.
We also evidence that the amounts due by Clients for freight comprise about € 12.9 million towards ENI Australia connected with the long production
stoppages of the Four Rainbow unit. We had regularly invoiced such hires because we considered this to be caused by the charterers and the analysis effected by independent experts (appointed by us) duly supported our
position. Additional amounts can be added to this, unduly withheld by ENI Australia in the last contractual period and other minor credits for a general
total of approximately € 16.9 million. As better highlighted in the report on operations, to which we would refer you, arbitration proceedings have been
brought with regards to Eni Australia, with claims of up to approximately 240 million dollars, of which most relate to the definition of the economic terms
of the last contractual period, performed under specific reservation and for which a specific arbitration award has already established the invalidity of the last extension exercised by the charterer. The expectations for a favourable outcome to the dispute are fairly high, with reasonable expectations for recovery well in excess of the amounts recorded on the financial statements. Please refer to the Notes for a more detailed analysis.
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Liquidity risk:
Cash-flow, financial requirements and liquidity are strictly monitored and assessed in order to efficiently manage the Group’s financial resources, under the control and coordination of the Parent Company. Short and long-term cash requirements are regularly assessed in order to ensure timely and adequate acquisition of financial
resources, as well as proper employment of cash excess. Information on future due dates for amounts due to banks are provided in the Notes to the Financial
Statements.
Certain assets and liabilities are exposed to risks arising from exchange rate fluctuations (mainly related to the euro/dollar rate). It is a Group’s policy to partially cover this risk by derivative hedging instruments as well as by natural hedging.
Additional protection is offered by controlled companies whose accounts are (at least for consolidation purposes) denominated in US$. Please refer to the Notes
for information on the financial derivatives transactions entered by the Group.
At 31.12.2012 the main US$-denominated assets and liabilities are summarized as follows:
The table does not include the residual amount (moreover of an insignificant value) of loans in currency converted from the original currency to the euro by cross currency swap, as - because of this - in fact it is no longer subject to exchange risk. Please refer to the Notes for more detailed analysis of the more significant balance sheet entries expressed in US$.
It is noted that where the average €/US$ exchange rate in 2012 was equal to the
average value recorded in the previous year and the exchange of the dollar at the end of the year was equal to the value recorded at the end of the prior year,
with all other conditions being equal, the economic result would have been € 1.9 million lower and Shareholders’ Equity would have been reduced by a
similar amount.
Currency translation ratios in relation to other currencies were not calculated as they were not considered significant in terms of limited volume and the value of
transactions in other currencies. Exchange risk:
Assets
Cash and cash equivalent Trade receivables Loans Other credit Total Liabilities Bank debts Suppliers Other payables Total US$/000 10,802 11,705 298 2,962 25,767 252,581 7,811 519 260,911
Interest Rate risk:
The majority of long term bank loans are based on floating interest, therefore, the Group is exposed to interest rate fluctuation risk. It is a Group policy to reduce
such a risk through financial derivatives, fixing the interest rates for certain periods. Please refer to the Notes for information on the financial derivatives transactions entered by the Group.
The currency translation ratio shows that when interest rates (payable and receivable) during the year are on average higher/lower by one percentage point than what is actually entered, with all other conditions being equal, the net result and Shareholders’ Equity would be reduced/increased respectively by € 3.3 million, considering hedging.
Freight Volatility risk:
The Group operates in a market characterised by very volatile freight rates.
Risks related to freight rate fluctuations may be reduced by signing long-term time-charters or by derivative contracts (Forward Freight Agreements, FFAs).
Please refer to the Notes for information on the financial derivatives transactions entered by the Group, noting that no FFA transactions were performed in 2012. The currency translation ratio shows that when market charters registered during the year are on average higher/lower by 10% than what is actually seen, with all other conditions being equal, the net result and Shareholders’ Equity would be increased/reduced respectively by € 2.6 million. This change only refers to the fraction of time/ship, which at the start of the year was not yet hedged by commercial loans and was therefore exposed to the risk of change of the charter market.
As far as the year 2013 is concerned, at today’s date the freight rates volatility risk affects 8.3 year/vessel, considering that all other vessels (owned and chartered-in) are already covered by contracts.
Regarding the next three year period, we note that 30% of the time/ship available in 2014 are covered by specific freight contracts, 16% of the vessels in 2015 and 14% of the time/ship in 2016 (assuming that all the vessels under construction are delivered on time and considering 50% of the units which are part of the joint venture with the Messina Group).
Risks related to the present crisis:
All of the above considerations apply to normal market conditions.
The ongoing contingent situation of deep economic and financial crisis enhances the risk (very difficult to evaluate in advance) of default and/or not performance of contractual obligations by counterparts like shipowners, charterers etc.
The above is confirmed by the default/non performance situations reported in the last years for big and experienced players, usually considered as fully reliable.
This has inevitable had repercussions on the financial system, which has further restricted available financing, with particular reference to shipping, particularly in regard to current investments or non asset based transactions. Despite this, a small number of new transactions have been confirmed, although for proportionally lower amounts and at significantly higher costs compared to pre-crisis years. In this context, the difficulties experienced in obtaining traditional long-term shipping loans to cover investments are increasing, and these loans, with respect to the past, are in any case of smaller values and encumbered by significantly higher spreads.
With regards to our more direct interests, despite the generalised difficulties encountered in accessing credit, we note the successful completion of some operations/renegotiations of corporate lines developed in 2012 and would point out that the new units that started operation in the four-year period 2009/2012 have found suitable long-term finance from national banks. The two units envisaged for start-up during 2013 have also already found suitable financial coverage. For the last unit under construction, forecast to start
operating at the end of the first quarter 2014, by virtue of the favourable multi-year loan contract already stipulated, we are reasonably certain of being
able to organise suitable coverage.
In the difficult context described, Associate Four Jolly S.p.A. (our share 50%), preferred to lighten its financial position by cancelling the contract for one of the two units commissioned and selling the second unit to third parties upon delivery by the shipyard in February 2013. This meant a major economic sacrifice, entirely booked to the financial statements for FY 2012.
The Associate, having met the requirements, asked to benefit as envisaged by the ABI agreement of 28 February 2012 (the “Late Payment for small and medium enterprises”) and to suspend repayment of the capital instalments of medium/long-term loans for twelve months. The request was upheld and repayment of the capital amount of the loans will resume in 2013.
The continued situation of little profitability of the ships has inevitably kept the related equity values down and, above all for units with no commercial coverage and reduced residual life, or for more recent units with higher construction costs, on the one hand has not enabled any recovery of impairment recorded in the past and, moreover, has entailed the need to record new impairment for five units, as better detailed below in these explanatory notes.
The reduced market values of the ships may also entail the failure to respect loan-to-value ratios envisaged in almost all traditional medium/long-term naval loans backed by mortgages. In a context of generalised difficulty experienced by all shipping segments and characterised by numerous requests to restructure debt, also by operators with an excellent reputation, the attitude of the main banks has mainly been one of support to shipowners, not requiring the formal verification of compliance with the parameter, or rather granting the extensions requested. As far as we are directly concerned, we believe that this situation may only involve a single ship of the parent company and many of the units owned by subsidiaries and related companies.