4.3. risks and uncertainties 4.3. risks and uncertainties

overcoming adversity

Due to our international presence, we face a number of risks. These can be endogenous, for example, related to quality, human resources or financing, and exogenous, such as exchange variation, regulation, political instability, or economic evolution. 2019 was marked by the risks presented below.

Credit Risk
The exposure to the risk of default arises from Nors’ companies’ commercial and operational activity. To ensure its management, we have a specific department, governed by established procedures and mechanisms for collecting financial and qualitative information — hence the assessment of debtors in fulfilling their obligations. This department is also responsible for managing customer accounts and respective billing.

Foreign exchange rate risk
Operating internationally, we are exposed to the possibility of recording losses resulting from variations in the exchange rate between the different currencies with which we operate. This risk, having an impact on results and cash flows, affects the results at the operational level. Likewise, it impairs the measurement of capital invested in foreign subsidiaries. Occasionally, in order to mitigate the aforementioned risk, we resort to the use of the forward exchange rate, particularly in commercial transactions where the purchase and sale currency are not the same. Fort the management of foreign exchange risk on equity, we have insisted, whenever possible, on natural hedging strategies.

Interest Rate Risk
The interest rate risk opens up the possibility of fluctuations in the amount of the financial charges borne by Nors related to loans taken out in the countries in which we operate. However, with the future entry in different markets and different economic environments, we obtain a portfolio of loans and investments less sensitive to the increase of the interest rate specific to certain countries. It should be noted that, in 2014, we contracted an interest rate swap to set the Euribor rate to one month, which ended in 2019. Also, part of our structured debt is contracted at a fixed rate.

Oil Price Risk
The variation in the price of oil affects the economy of some markets where we are present, becoming an indicator of risk, namely in the Angolan market. The significant influence of the oil sector in the Angolan economy affects the country’s economic performance, impacting all economic agents directly or indirectly — from the State to companies, not forgetting the individual consumer and families. Thus, as it has happened in the recent past, in case of any significant drops in oil prices in international markets, the impact on the Angolan economy is directly felt — tax revenues and the currencies stocks decrease, leading to a contraction in imports and local commerce.

Liquidity Risk
Another of the risks that we face is the inability to settle or meet obligations within the defined time frames and at a reasonable price — the so-called liquidity risk. In managing this risk, we aim to achieve three objectives: liquidity, security, and financial efficiency. Liquidity guarantees access to funds on a permanent, efficient, and sufficient basis to account for current payments on the respective due dates, as well as for possible requests for funds, even those not foreseen within the set time frames. Security, in turn, guarantees us to minimize the probability of defaulting in the repayment of any application of funds. Finally, financial efficiency ensures that Nors and our business units/management structures maximize the value created and minimize the opportunity cost of holding excess liquidity in the short term.

Generally speaking, the responsibility for managing the liquidity risk lies with Nors’ Finance Department. However, to ensure the existence of liquidity in both Nors and our business units, there are working capital management parameters that allow, safely and efficiently, to maximize the return obtained and minimize the associated opportunity costs. It should be noted that at Nors, all the existing liquidity surpluses should be applied to the amortization of short-term debt. To this end, the most pessimistic scenario for the maturity analysis of each of the passive financial instruments is adopted as the basis, in order to minimize the liquidity risk associated with these obligations. On December 31, 2019, and 2018, we showed, respectively, a Net Debt of 72.1 million euros and 98.7 million euros. These amounts are divided between current and non-current loans, Cash in hand and at banks contracted with various institutions, as well as debt securities with liquidity (Treasury Bonds).

Capital Risk
Our main goal is to ensure our operations’ continuity, providing an adequate remuneration to shareholders and the corresponding benefits to the company’s remaining stakeholders. To pursue this objective, careful management of the capital employed in the business is essential, seeking to secure an optimal capital structure and, thus, guarantee the necessary reduction in its cost. To maintain or adjust the capital structure considered adequate, the Management may propose to the shareholders’ General Assembly the measures it deems necessary.

Simultaneously, we seek to maintain a level of equity appropriate to the characteristics of the main business, as well as to ensure continuity and expansion. The capital structure balance is monitored based on the financial leverage ratio, calculated by dividing net interest-bearing debt by the sum of net interest-bearing debt with equity.