ANNUAL REPORT 2008 - Gorenje Group

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The exposure to each type of risk and the hedge measures to be applied are judged and implemented
on the basis of their effects on the cash flows. To hedge against financial risks in the course
of ordinary business activities, relevant hedging activities have been conducted in the area of operating,
investing and financing activities.
In 2008, in the light of the strained macroeconomic situation, more attention was paid to the credit
risk which includes all risks where the failure of a party (a buyer) to discharge contractual obligations
results in a decrease in economic benefits of the Company. The credit risk was managed by
application of the following sets of measures:
• insurance of a major portion of operating receivables against credit risk with
Slovenska izvozna družba – Prva kreditna zavarovalnica d.d.;
• additional collateralisation of riskier trade receivables by bank guarantees and
other security instruments;
• regular monitoring of operation and financial standing of new and existing business
partners, and limitation of exposure to certain business partners;
• implementation of mutual and chain compensation with buyers;
• systematic and active control of credit limits and collection of receivables.
With regard to the geographic diversification of its operations, the Company is strongly exposed to
the currency risk, which is the risk that the economic benefits of the Company may be decreased
due to changes in foreign exchange rates. Due to considerable macroeconomic changes and fluctuations
of (primarily) soft currencies in relation to the euro, the impact of currency risks has became
increasingly significant for the Company’s operations. When assessing currency risk exposure,
both cash flow exposure and balance sheet exposure have been considered. The currency
risk mainly results from business activities in the markets of Great Britain, Poland, Hungary, Croatia,
and the US dollar markets. A greater attention was paid to the natural hedging of currency risk and
the adaptation of business operations to ensure long-term decrease in currency fluctuation exposure
by matching or netting sales and purchases. Additional short-term hedging is carried out by
currency future contracts and short-term borrowings in currencies, to which the Company is exposed.
In the last few years, great attention was also paid to interest rate risk, which is the risk that the economic
benefits of the Company may be decreased due to changes in interest rates in the market. In
2008 the volume of hedging against interest rate risk was decreased over the previous year’s figure,
so that the share of fixed interest rates and derivatives hedging against interest rate risk was
equal to 49.9 percent of the loans portfolio of the Company. A lower level of fixed interest rates is a
consequence of higher indebtedness of the Company and the maturity of certain derivatives.
Liquidity risk is the risk that the Company will fail to meet commitments in stipulated period of time
due to the lack of available funds.
The financial liabilities of the Company in the amount of EUR 186 million mature in 2009. For this
reason the Company started, in the last quarter of 2008, to negotiate with the banks the rescheduling
of the existing financial liabilities and thus to decrease the risk of debt rescheduling. The liquidity
reserve in the amount of EUR 48.5 million, consisting of unused revolving lines of credit and cash
in banks of the Company, is used to ensure adequate short-term control of cash flows and to decrease
short-term liquidity risk.
Short-term liquidity risk of the Company is estimated as increased due to efficient cash management,
adequate available lines of credit for short-term control of cash flows, a high degree of financial
flexibility, and a good access to financial markets and funds. The reason for an increase in
short-term liquidity risk is a decrease in availability of sources of finance from business partners,
both buyers and sellers.
Long-term liquidity risk of the Company is estimated as moderate due to efficient operations, effective
cash management, sustainable ability to generate cash flows from operating activities, and
an adequate capital structure.