Financial Risks

Financial Risks

NORMA Group is exposed to several financial risks, including FX, interest, default, liquidity and commodity risks. The Group’s financial risk management strategy concentrates on the identification, evaluation and mitigation of risks, focusing on minimizing the potential negative impact on the Company’s financial, asset and earnings position. Derivative financial instruments are used to hedge particular risk items.

FX Risks

The continuous identification and measurement of fx risks is carried out in Group Treasury, where it is managed by concluding suitable hedging instruments. Not only derivative hedging instruments are used, but also suitable foreign currency financing that reduces the fx risks (natural hedge). Overall, the aim is to optimize the assets and liabilities side of the balance sheet with regard to this. Also operational currency risks above a defined threshold value in the entities are reduced using derivatives. Group-wide liquidity planning differentiated by currency is the key for identifying and controlling these risks. Main FX positions at risk for NORMA are denominated in USD, GBP, CHF , CNY, PLN, CZK, SGD, INR and RSD.

Interest Rate Risks

For limitation of interest rate risk, it is the main aim of NORMA to monitor and control all variable financial instruments. This means that hedging variable positions is an option but – depending on the market – is not necessarily applied. Currently and due to the active US market NORMA hedged and hedges a high percentage of USD denominated variable instruments using payer interest rate swaps variable debt instruments in EUR are only partly hedged at the moment due to the very low level at the moment and the forecast that the level will remain for a while.

Group Treasury regularly monitors the risk positions and assesses them with regard to their risk-bearing capacity. If certain risk parameters are exceeded, countermeasures are initiated.

Liquidity Risks

Liquidity risk management requires the holding of sufficient cash and cash equivalents and market-able securities, the availability of adequate funding through committed credit lines and the ability to close out market positions. Due to the dynamics of the underlying business, Group Treasury strives to maintain flexibility in financing by maintaining the availability of committed credit lines. Main target is to ensure the continuous solvency of the group. At the end of the year 2018 cash and cash equivalents amounted to 190,4 Mio. EUR. In addition, the NORMA Group enjoys a high degree of financial flexibility through a firmly committed revolving credit line with national and international banks with a total of 50 Mio. EUR. This facility was not utilized as of December 31, 2018. NORMA Group also has an accordion facility of up to 148 Mio. EUR which has not been committed, but has been negotiated and offers further financial flexibility.

The probability that the liquidity risks will have a negative impact on the activities of the NORMA Group is highly unlikely due to the high degree of financial flexibility provided by credit lines that have been committed but not utilized yet. The risk that financial covenants will not be met is still considered as highly unlikely due to high profitability and a strong operating cash flow. In the event of short-term increased liquidity requirements exceeding currently negotiated credit lines, the possibilities of raising funds at market conditions are assessed as very good.

Credit Risks

The risk position with regard to credit risk are monitored regularly. For this purpose, all of NORMA’s connected banks are examined in terms assets with one bank, the bank’s CDS and rating. Assets are mostly cash and cash equivalents, short term investments as well as derivatives with a positive market value. Group Treasury reviews the history of CDS and rating for each and every bank above a critical asset threshold. Furthermore Group Treasury checks the general asset allocation of all assets. If all assets are allocated to banks with BBB it might be useful to shift at least a portion to banks with a better rating.

Commodity Price Risks

The materials used by NORMA, in particular the basic materials steel and plastic, are subject to the risk of price fluctuations. NORMA does not carry out derivative hedging for commodity price risks yet, but pursues a natural hedging strategy and passes on fluctuation from the supplier to the customer.

The risk of rising purchase prices is limited by systematic material and supplier risk management. With an efficient global group purchasing structure, economies of scale are exploited in the procurement of the most important product areas such as steel, metal components, polyamides and rubber material. These are procured as competitively as possible. In addition, through constant technological progress and the testing of alternative materials, an attempt is also being made to reduce dependence on individual materials. NORMA protects itself against the volatility of raw material prices by concluding contracts with a term of up to 24 months, thus minimizing risks to the supply of materials and making price fluctuations more easily calculable.