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Financial Policy and Rating

During 2007 various financial transactions were carried out in order to guarantee an increasingly sound financial structure and a cost of money at levels as competitive as possible, in spite of the broadening of the spreads following the problematic international market conditions. The financial policy objectives which the Company had already set for itself at the start of the year were as follows:

  1. Interest-rate Risk: definition and application of a strategy for hedging the interest rate risk which is accurate and consistent with consequent total coverage of the long-term debt at a fixed rate.
  2. Debt Quality: consolidation of the short-term debt in favour of the long-term portion.
  3. Credit Lines: attainment of abundant uncommitted and committed credit facilities, so as to ensure sufficient liquidity for covering each financial commitment at least over the next two years.
  4. Financial Charges: reduction of the cost of money.

In this light, the following was carried out in 2007:

  1. Interest-rate Risk: all  hedging transactions in place are perfectly consistent with the underlying debt and in compliance with IAS standards. The long-term transactions were swapped at a fixed rate.
  2. Debt Quality:  in 2007 re-financing transactions were carried out in order to consolidate long-term debt and to reduce charges. The most important ones of these are explained below:
  • on 17 May 2007 a put bond was issued by Hera Spa with an “A” rating given by S&P for a total of Euro 100 million, entirely subscribed by Deutsche Bank AG London,  The bond – the first launched in Italy in the market of reference – for the firs three years is regulated by Euribor 3 months reduced by 29 points. If the put option is not exercised by the bond holder at the end of the third year, the bond shall be regulated for an additional 10 years at a fixed rate of 4.593% in addition to the Hera credit spread. In this case Hera shall be entitled to exercise a call option on the entire amount in the remaining period. If instead the put option is exercised at the end of third year, the bond shall be repaid at the same amount.
  • On 2 August 2007 a Euro 200 million extendable put bond with a Standard & Poor’s rating of “A” was issued and entirely subscribed by Bnp Paribas. For the first 5 years, the bond cannot be called, and it has a variable rate quarterly coupon indexed to the 3-month Euribor less a 45-cent spread. For the following 15 years, the couple will have a fixed rate of approximately 4.85%, increased by the two-year Hera credit spread. Holders of the bond will be able to request reimbursement every two years at par value or continue for the following two years at the above-mentioned conditions. Hera will always have the right to provide early redemption at market price.
  • On 13 November 2007 an extendable step-up put loan was entered into with Royal Bank of Scotland Plc for a total of Euro 50 million for the first three years, which can be later increased to Euro 70 million through another disbursement of Euro 20 million for the next 10 years, at the bank’s discretion. The transaction will be regulated for the first three years with a quarterly coupon deferred at variable rate calculated based on the 3-month Euribor less a 0.45% spread. If the bank does not exercise the put option requesting repayment on equal footing, the coupon will be regulated at a fixed rate of 4.41% increased by the two-year Hera credit spread for the next ten years (with a 0.45% cap). The bank can ask for repayment of the loan on equal footing at the end of the third year and every two years that follow. Should the put option not be exercised, the rate will still be the one stated above. After the first three years Hera Spa can repay the loan, coinciding with every date of payment of the interest at the market price.
  • On 28 November 2007 a loan entirely similar to the previous one was entered into with Barclays Bank Plc, the only difference being that the spread less than the Euribor for the first three years is 0.46%, while the fixed rate for another 10 years, if needed, is 4.44% (again increased by the two-year Hera credit spread with a 0.45% cap).

 

All of the transactions described above were designed in-house so as to perfectly fit the Group’s needs and in the meantime get extremely competitive costs without exposing the company to risks, interest rate risk or added cost. The variable rates of the initial time periods of the two put bonds have, on the other hand, been swapped at a fixed rate and financial covenants are not contemplated, except for a rating reduction below the investment grade level. The short-term rate is much lower than the market rate, whereas the long-term rate is the same as an alternative simple loan.

Lastly, it is not believed that the potential implicit refinancing risk in case the put option is not exercised by the lenders can be considered as such in so far a

  • the loans in question can be considered similar to 3- or 5-year loans with bullet repayment
  • their expiration dates are not concurrent, but vary over time
  • the business plan that Hera Spa’s BoD approved does not show a worsening of its credit, and therefore shows no difficulty in entering the capital markets over the next few years
  • Hera Spa has at its disposal some back-up, committed and available lines of credit totalling Euro 250 million in order to be able to in any case deal with potential due dates.

 These line are however currently being increased to a total of Euro 300 million and with repayment in advance for another 3 years.

  1. Credit Lines: the credit facilities and the related financial activities are not concentrated on any specific financial backer but are distributed equally among leading Italian and international banks with a use lower than 30% of the total available.Liquidity as at 31 December 2007 amounted to Euro 211 million.
  2. Financial Charges: in spite of the considerable increase of rates and spreads, Hera has been able to keep the cost of money at an overall average level of 4.3%, therefore beneath the market quota.

Readers are reminded that Hera Spa has a bond outstanding for Euro 500 million, featuring a fixed rate coupon of 4.125%, maturing in February 2016.

Thanks to the cash flow produced and the sound equity and financial structure, overall it is believed that the Group is thus able to meet the important investment plan envisaged by the Industrial Plan.

Hera Spa maintained an “A1 stable” long-term rating from Moody’s and an “A stable” rating from Standard & Poor’s and it is the Group’s intention to endeavour so as to maintain these highly outstanding rating levels in the future.