Our Annual Bond Report 2011 contains a description of certain risks that could materially adversely affect our business, financial condition, results of operations or cash flows.
You should carefully consider the risks described in our Annual Bond Report 2011 before making an investment decision. Any of the risks mentioned there could materially adversely affect our business, financial condition, results of operations or cash flows, and as a result you may lose all or part of your original investment. These risks are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition, results of operations or cash flows.
This Quarterly Report contains “forward looking” statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward looking statements. Factors that might cause such differences are discussed in the Annual Bond Report 2011 and elsewhere in this Quarterly Report.
In Q3/2012 there have been no material changes to the risk assessment made in our Annual Bond Report 2011. However we updated the following risk factors to reflect recent developments:
Cyclical fluctuations in macroeconomic activity have always affected the market for industrial trucks. A downturn or stagnation in the industries and regions relevant to the KION Group represents a risk. Customers' decisions on whether to invest, particularly in new trucks, depend to a large degree on the economic situation. The KION Group mitigates this risk with its multi-brand strategy, comprehensive product portfolio and a diverse customer base consisting of companies of different sizes in different industries and regions. Market risk is also reduced by close monitoring of markets and competitors as well as any resulting necessary adjustments to production capacities. The KION Group takes measures to boost its sales and further expand less cyclical business activities such as services in order to counteract economic downturns.
Global economic prospects have been very varied in recent times, and the markets therefore remain fragile. The International Monetary Fund (IMF) believes the global economic situation is still at risk due to the decline in the pace of growth in all regions of the world and owing to uncertainties regarding the funding position of public finances and financial institutions. In particular, the following factors pose a risk to the global economic development as a whole: any worsening of the Eurozone crisis, a sharp slowdown in the United States, and an ongoing slower growth trajectory in major emerging market economies. Current developments, above all in Europe, are making it increasingly difficult to gauge demand patterns reliably. The precise timing and even the extent of any change in the markets remains uncertain. The KION Group therefore closely monitors macroeconomic and market conditions so that it is ready to promptly step up action already implemented or initiate additional measures if required.
The main types of financial risk managed by Group Treasury, including risks from funding instruments, are liquidity, exchange rate, interest rate and counterparty risks. Credit risk consists solely of counterparty risks attached to financial institutions. Risk management procedures issued by Group Treasury stipulate how to deal with the aforementioned risks. In contrast, the individual Group companies directly manage counterparty risks involving customers.
The restructuring of the existing acquisition finance during 2009 continued to provide the Group with the flexibility needed to meet the requirements of the lending covenants. Accordingly, the KION Group has secured acquisition finance in the form of committed credit lines. The individual tranches have varying maturities. KION has extended a substantial portion of its Senior Facilities, including extending Revolving Credit Facility (RCF) commitments from December 2013 to December 2016 in an amount which (together with approximately €113 million of new RCF commitments received) totals €300 million, and extending approximately €800 million and approximately $200 million of Term Loan B (TLB) and Term Loan C (TLC) from December 2014 (TLB) and December 2015 (TLC) to December 2017. Furthermore the Term Loan G (Shareholder Loan) of about €114 million was extended from December 2016 to June 2018. On 31 July 2012 the amended and restated Senior Facilities Agreement became effective (details under “Factors affecting our Business”). In addition, €483 million of the original acquisition financing have already been repaid through the corporate bond of €500 million with maturity in 2018 and issued in April 2011. Further measures to ensure long-term financing are actively and continuously pursued by the Company.
On 7 November 2011, the KION Group had drawn down €133 million from the Revolving Credit Facility. Although sufficient liquidity was available for operational business, capital expenditure and debt servicing, a stronger cash position was considered prudent in light of the volatility of the financial markets. In May 2012 we repaid this drawing as we considered the financial markets to be stabilising. As contractually agreed, the Capex Facility was reduced by approximately €28 million in the course of 2012.
The KION Group generally refers to credit ratings to manage counterparty risk when depositing funds with a financial institution. Deposits are also restricted to the limits covered by the deposit protection fund run by the Federal Association of German Banks.
The KION Group only uses derivatives to hedge underlying operational transactions; they are not used for speculative purposes. Records are kept of the type of financial instruments used, the limits governing their use and the group of banks acting as counterparties. Group Treasury rigorously complies with and monitors the strict separation of functions between the front, middle and back offices.
Each Group company's liquidity planning is broken down by currency and incorporated into the KION Group's financial planning and reporting process. Group Treasury checks the liquidity planning and uses it to determine the funding requirements of each company. Normally, at least 50% of the exchange-rate risk related to the planned operating cash flows based on liquidity planning is hedged by currency forwards in accordance with the relevant guideline.
The KION Group uses interest-rate and currency-related derivatives – primarily interest-rate swaps and currency swaps, but also interest-rate and currency options – to hedge the interest-rate and currency risks arising in connection with the acquisition finance. Approximately 50% of the currency risk arising from the US dollar tranche is hedged by currency forwards with an average €-US$ exchange rate of around 1.38. These derivative contracts expire in November 2012. When the currency hedges expire, there may be a material outflow of funds, depending on the US dollar exchange rate. At the end of September 2012, around 59% of the interest-rate risk was hedged by interest-rate swaps or was subject to a fixed rate of interest. The need to add new hedging instruments or replace ones that expire is being reviewed on an ongoing basis.
The funds raised for acquisitions also give rise to risks for the KION Group in terms of compliance with certain financial covenants specified in the relevant loan agreement. This risk continues to apply in view of the current uncertain economic and financial market environment. However, the Company is mitigating it by continuing to increase efficiency and by ensuring sufficient flexibility when entering into new lending agreements. The KION Group complied with all the lending covenants in the reporting year.