The CIR group operates in various industry and service sectors, both nationally and internationally, so its business is exposed to various kinds of financial risk, including market risk (currency risk and price risk), credit risk, liquidity risk and interest rate risk. In order to minimize certain types of risks, the parent company and its subsidiaries, each to the extent of its competence, put in place appropriate mitigation measures, including the use of hedging derivatives.
Market risk
The parent CIR S.p.A. and the financial holding companies CIR Investimenti S.p.A. and CIR International S.A. manage financial assets, both directly and through funds and asset management schemes. Their results, as well as their balance sheets, are therefore subject to the risk of fluctuations in market prices. The group mitigates this risk by defining a conservative and diversified investment policy, monitoring the Value at Risk of the overall portfolio and resorting, where appropriate, to risk hedging derivatives. As the group operates internationally, Sogefi in particular, it is exposed to the risk that fluctuations in exchange rates could affect the fair value of some of its assets and liabilities. The Sogefi group produces and sells mainly in the Eurozone, but it is subject to currency risk, especially versus the following currencies: US dollar, Chinese renminbi, Canadian dollar, GB pound, Brazilian real and Argentine peso. Regarding the translation foreign exchange risk related to the financial statements of foreign subsidiaries, the operating companies generally have a high degree of convergence between the currencies of their sourcing costs and their sales revenue usually both in local currency, although in certain cases, they are active both in their own domestic markets and abroad and, if necessary, can arrange funding locally: in case of need, financial resources are found, where possible, in local currency.
Credit risk
The group is exposed to credit risk both in commercial terms in relation to the type of customers, the contractual terms and the concentration of sales, and in financial terms in relation to the creditworthiness of the counterparties used in financial transactions. There are no significant concentrations of these risks within the group. Some time ago adequate policies were put in place to ensure that sales are made to customers of an appropriate credit history. The counterparties for derivative products and cash transactions are exclusively financial institutions with a high credit rating. The group has policies that limit credit exposure to individual financial institutions. Credit risk can vary depending on the business segment concerned. In the “Automotive Components” sector there is no excessive concentration of credit risk since the Original Equipment and After-market distribution channels with which the Sogefi group operates are car manufacturers or large purchasing groups without any particular concentration of risk or counterparties with low creditworthiness. The “Healthcare” segment shows a higher concentrations of receivables, since its main counterparties are the Italian and German public administration. This concentration is also mitigated by the fact that the exposure to the Italian public sector is distributed over a large number of counterparties (individual regions and ultimately the local health units), and a significant portion of the receivables is from individual private customers. For example, the concentration of receivables is lower than in the case of management of residential care homes, whose revenue derive more than 50% from the number of guests in the facility and whose receivables recorded in the financial statements from public entities (mainly local health authorities and municipalities) are due from a plurality of subjects. The concentration of receivables is greater in the case of hospital management due to the fact that almost all of the revenue derives from the public sector. The monitoring of credit risk versus customers includes grouping receivables together by type, age, whether the company is in financial difficulty or is involved in disputes and the existence of legal or insolvency proceedings.
Liquidity risk
In order to maintain a correct balance between procurement and use of financial resources, group companies make sure that they maintain sufficient liquidity and/or negotiable securities and access to additional financial resources, obtainable through an adequate level of committed credit lines. The companies heading up the three main business segments (automotive, healthcare and management of financial assets of holding companies) manage their own liquidity risk directly and independently, through centralised treasury operations. The operating group companies ensure strict control over the net financial position and its short, medium and long term evolution, follow a very prudential debt policy, having recourse largely to medium/long term financing structures and in excess of the expected needs, and systematically respect the deadlines of payment commitments, conduct that makes it possible to operate in the market with the necessary reliability. The parent and the financial holding companies, which have a positive aggregate net financial position, manage liquidity risk, relating to the monetization of assets if cash is required for investments or other uses, through an investment policy that provides for the short-term liquidability of the majority of financial assets.
Interest rate risk
Interest rate risk depends on fluctuations in market rates, which can cause changes in the fair value of cash flows of financial assets or liabilities. The interest rate risk mainly concerns long-term loans the interest expense of which may vary as the reference rate adopted varies. In line with the group’s risk management policies, the parent and the subsidiaries have entered into various IRS contracts with leading financial institutions over the years in order to hedge the cash flow risk linked to the change in the short-term interest rate and on loan contracts at variable interest rate.
