Risk inventory

Significant risks inventoried and identified by Gamma Holding are described below. The risks identified have been evaluated as effectively and thoroughly as possible, though there can always be risks that have not been (properly) identified, or that are considered to be of lesser importance at this time.

Risk Inventory

Kind of risk	Description	Measure(s) of control
Market risks	Credit crunch	The global recession gave rise to continued uncertainty in 2009 about the credit worthiness of financial institutions and their capacity to grant credit to companies. This development led Gamma Holding to continue to implement tighter measures to control credit risks. In 2009 explicit attention was once again devoted to following up trade receivables, timely collection of amounts outstanding and adjustment of limits on trade receivables (if credit insurers started lowering limits), in combination with stringent cash management.
	Competitive pressure	Some of the markets in which the business units operate are characterised by increasing competition from low-wage countries. Gamma Holding is trying to stay ahead of the competition by focusing strongly on optimising its business processes. It is also devoting more attention to strengthening market positions by expanding marketing & sales and intensifying product and process innovations. In 2009 concrete action was taken in this respect, for instance by expanding sales organisations within the group, placing added emphasis on anchoring development activities and launching new products. Particularly in market segments with low margins, Gamma Holding must continuously adapt to changing market conditions in order to retain its attractive market positions and to achieve further growth. In recent years it has done this by relocating production and fabrication activities to low-wage countries. These two elements, the optimisation of business processes and the strengthening of market positions, create opportunities to enhance Gamma Holding’s distinctive identity as a niche player vis-à-vis its competitors. The aim is to deliver distinctive quality and service with production capacity that allows a flexible response to the needs and wishes of customers and the market.
	Fewer suppliers and fluctuating prices of raw materials	Gamma Holding manufactures high-quality products for specific applications, which must meet the stringent requirements of customers and end-users. Consequently, the raw materials that Gamma Holding uses for its products must comply with strict specifications. However, the chemicals industry, which supplies such raw materials, is made up of a limited number of players in a market that is in a constant state of flux of consolidation and disposal. In order to retain access to these raw materials with the right specifications, Gamma Holding is continually strengthening its ties with its suppliers. It is also constantly on the look-out for new suppliers in emerging markets who, after a thorough testing period, can supply such raw materials. With this strategy, Gamma Holding is striving to reduce its dependence on its suppliers. In 2009, Gamma Holding again had to contend with fluctuating energy and raw material prices. In order to minimise the effects of this, the company is constantly looking for ways to use these resources more effectively and more efficiently. To this end it has made investments and set up projects to promote energy saving.
	Political and economic instability	New growth markets not only present opportunities, but also involve risks. One of these is the political and economic instability of the countries in which Gamma Holding establishes operations. A sudden change of government or a lengthy political crisis can affect the economy of a country. This can hamper business activity and thus impact Gamma Holding’s profitability. Gamma Holding has made the strategic choice to shift production to low-wage countries. Therefore, each decision to relocate production is preceded by a risk analysis, which identifies not just political risks, but geographical ones too, and weighs them up against the total risk profile of the group. Also in markets where Gamma Holding has had a presence for a longer period of time, political and economic stability is a constant focus of attention. For example, throughout the years, Vlisco Group has continually had to contend with unstable situations in Western Africa. These risks are taken into account when valuing the respective assets. In 2009, the situation in Ghana and Côte d’Ivoire, countries in which the business unit has production facilities, was reasonably stable.
Operational risks	Fire and business damage	On behalf of the operating companies, Gamma Holding has drafted a normative set of requirements for the implementation of measures in the field of fire and business damage. A central Technical Risk Manager assesses, on location, the risk profile of the companies and advises the management and the Executive Board on technical and organisational improvements. The policy formulated and the improvements implemented by the operating companies lead to an improvement in the risk profile and thus to lower premiums for the group. Increasingly, Gamma Holding’s production and fabrication locations are being combined. This leads to significant efficiency improvements, but at the same time reduces the number of alternatives to transfer similar types of production in an emergency. Accordingly, in order to minimise process disruption, the entire business process has a high level of technical security. Moreover, Gamma Holding is constantly looking for alternative facilities to which it can turn, both inside and outside the group.
	Management risk	Gamma Holding attaches great importance to well-balanced and effective management teams within all its operating companies. A shortage of personnel with the right competences at the right place could lead to a decline in Gamma Holding’s performance and to the company quickly falling behind the competition. Another risk is the dependence on key employees and the safeguarding of know-how. In this respect, human resource management will be strengthened within virtually all business units of Gamma Holding.
	Increasing environmental regulation	Throughout the world Gamma Holding is increasingly being confronted with new environmental legislation and regulations. Furthermore, the use of certain raw materials which are essential for the production process, is being questioned as a result of, among other things, REACH, the European regulations governing chemicals. On the basis of this, a number of suppliers are simplifying their product offerings, which can lead to changes in specifications for raw materials. In this context, Gamma Holding – in close consultation with the respective raw-material suppliers – is conducting additional acceptance tests and analyses in order to rule out the possibility of specification changes that could have an adverse effect on its products. In addition, Gamma Holding, as a responsible corporate citizen, is constantly seeking ways to reduce the amount of environmentally harmful raw materials used in the production process. As a result of REACH, the European companies within the group have devoted considerable attention in 2009 to the registration of chemicals that they use in their production process..
Financial risks	Foreign exchange risk	Gamma Holding operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities in foreign currencies and net investments in foreign operations. Each quarter, the subsidiaries report on their anticipated operational cash flows in foreign currencies for the coming twelve months. On the basis of this, it is decided, in consultation with local management, to what extent these anticipated cash flows should be hedged. It is Gamma Holding’s policy to hedge at least two-thirds of the currency risk of these anticipated transactions in each major currency for the subsequent twelve months, as far as practically possible. It is possible to depart from this policy if the market position gives reason to do so. Group Treasury is responsible for hedging the positions in foreign currencies by using external currency derivatives. Wherever possible, significant currency derivatives are designated as cash flow hedges. External currency derivatives can be used at group level as hedges of foreign exchange risk on specific assets, liabilities or future transactions. The US dollar is by far the most important foreign currency for Gamma Holding. All other things being equal, a 10 cent rise in the euro/dollar exchange rate as of 31 December 2009 would have had a negative impact on the net group result of 0.3 (2008: 0.3 positive) as a result of currency translation of financial instruments. All other things being equal, a 10 cent rise in the euro/dollar exchange rate would have had a negative impact on equity of 0.1 (2008: 0.3 positive) as a result of currency translations included in the hedging reserve on the basis of the applied cash flow hedges. Gamma Holding has many foreign subsidiaries, whose net assets are exposed to foreign exchange risk. Currency exposure arising from the net assets of Gamma Holding’s foreign operations is managed by financing the entities primarily through borrowings denominated in the relevant foreign currencies, within legal and fiscal parameters.
	Interest rate risk	Because Gamma Holding does not have any substantial interest-bearing assets, its operating result and operational cash flow are independent of changes in market interest rates. Gamma Holding’s interest risk arises from borrowings. Borrowings issued at floating rates expose Gamma Holding to cash-flow interest-rate risk. The policy is to maintain 30% - 70% of the balance of interest-bearing liabilities in fixed-rate instruments and thus to reduce the cash flow risk. As of 31 December 2009, 60% (2008: 56%) of the balance of interest-bearing liabilities were at fixed rates. Gamma Holding manages its interest-rate risk by using floating-to-fixed interest-rate swaps. The ratio of floating-rate to fixed-rate liabilities is reviewed each quarter.
	Credit risk	Gamma Holding has no significant concentrations of credit risk. The credit risk of trade receivables has been spread by spreading the activities. Sales to retail customers are paid for in cash or via credit cards. Credit insurance is also used in some situations. The age of trade receivables is reviewed periodically at a local level. Derivative counterparties and cash transactions are limited to financial institutions with strong credit ratings (Standard & Poor's single A or higher). Gamma Holding has policies that limit the amount of credit exposure to any financial institution. In principle, bank balances and deposits are held by financial institutions with, for the country in question, strong credit ratings.
	Liquidity risk	Gamma Holding’s finance policy stipulates that at least 50% of its credit requirements should be hedged with committed credit lines with a term of more than one year. In July 2009 improved borrowing terms were agreed with the syndicate of banks. The main group companies are parties to the financing agreement and have provided extensive collateral in that connection. In the new agreement the financial covenants have been eased and account has been taken of the difficult market conditions with which Gamma Holding has to contend. Moreover, an extension of the financing until mid-July 2011 is possible. This has given the company time to put into effect its programme of cost savings, divestments and restructurings. To reduce the company’s debt, the disposal of companies at a reasonable price is also being considered. Multi-year cash flow projections are used to determine whether the available credit facilities are sufficient to cover the expected credit requirement. On the basis of this analysis, Gamma Holding believes that, for the coming year, the credit requirement is adequately covered.
	Financing	Due to the economic crisis, Gamma Holding’s result during the year under review was put under pressure. In combination with the high debt burden, the company was no longer able to keep within the covenants agreed with the syndicate of banks. Taking into account the difficult market conditions, therefore, an easing of the covenants was agreed with the banks in July 2009. The shareholders have approved an extension of the term of this facility to July 2011, with a conditional right of conversion. In the course of the negotiation process regarding improved financing conditions, various stakeholders were found to have much less confidence in the company. One of the results of this was the appointment of a new Executive Board. One of the new board members’ most important objectives was to restore confidence, both internally and externally. In the second half of 2009, therefore, a great deal of time was spent on open and clear communication with employees, banks and shareholders. During the year under review the ratio of net interest-bearing liabilities to EBITDA did not exceed 5.9. As of 31 December 2009 Gamma Holding had managed to reduce this ratio to 4.2. The company aims to reduce this ratio structurally to below 3.0.