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Financial Policy and Rating

During the first half of the 2009, in spite of the difficult financial situation, the Group managed to contain the noticeable increase in the cost of money and at the same time not suffer impacts from the general reduction of available cash.

This objective was achieved mainly thanks to financial transactions closed before the crisis revealed itself. These transactions allowed us to maintain a solid and competitive financial structure and to avoid the need to turn to the market to finance maturing debt.

At the same time, the company continued to pursue its own financial policy objectives as follows:

  1. Interest Rate Risk: definition and application of a strategy for hedging the interest rate risk, which is accurate and consistent with consequent total coverage of the long-term debt at a fixed rate.
  2. Debt Quality: consolidation of the short-term debt in favour of the long-term portion.
  3. Credit Facilities: attainment of abundant uncommitted and committed credit facilities, so as to ensure sufficient liquidity to cover each financial commitment at least over the next two years.
  4. Financial Charges: reduction of the cost of money.

In this light, the following was carried out during the first half of 2009:

1.      Interest Rate Risk: all hedging transactions in place are perfectly consistent with the underlying debt and in compliance with IAS/IFRS. The long-term variable rate transactions were simultaneously hedged at a fixed rate.

2.      Debt Quality: during the first half of 2009, the long-term portion of the debt accounted for about 90% of the total.
To maintain its objective of consolidating short-term debt in favour of the long-term portion, during the first half, a 15-year refinancing transaction was prepared, then closed on 24 July 2009, which will help sustain the debt quality of the Group.
In detail, this involved a bond issue with a maturity of 15 years for a total of 20 billion Japanese yen, completely underwritten by a single investor, to be repaid with a six-month, fixed-rate 2.925% coupon. At the same time, the bond was hedged for about Euro 150 million, thus eliminating the exchange rate risk and obtaining a competitive rate approximately equivalent to a 7-10-year Eurobond transaction (3-month EURIBOR + 238 bps). During its life, this operation does not have options. In addition, there are no financial covenants except that of a lower limit on the corporate rating, even by a single agency, of “Investment Grade” (BBB-).

It should be remembered that Hera SpA has an outstanding bond of Euro 500 million with a fixed-rate coupon 4.125% and a maturity of February 2016, and other puttable bond issues for a total of Euro 500 million with various maturities over time. Concerning the latter, it is not believed that there would be a potential implicit refinancing risk if the put option were exercised by the lenders. This because (i) the loans in question can be considered similar to 3- or 5-year loans with bullet repayment, (ii) in any case, their expiration dates are not concurrent, but vary over time, (iii) the business plan approved by the Board of Directors does not highlight a worsening of credit; therefore, difficulties accessing the capital markets in the coming years are not expected; and (iv) Hera SpA has backup, irrevocable and completely available lines of credit for Euro 480 million, with which to meet potential maturities.

3. Credit Facilities: the credit facilities and the related financial activities are not concentrated with any specific financial backer but are distributed equally among leading Italian and international banks with a drawdown lower than 30% of the total available.

4. Financial Charges: in spite of the considerable increase of rates and spreads, Hera has been able to keep the cost of money at an overall average level of 4.5%, below the market level. With the objective of containing the cost of money, concerning the 200-million-euro extendable put bond, during the first half, Hera SpA signed an agreement with the investors, which modifies some contractual terms, using the volatility of the market at the time. The agreement provides for a reduction of the fixed rate (continuation rate) that will regulate the bond beginning in 2012. From 8 August 2012 until 7 August 2016, the coupon will go from 4.85% (plus the Hera credit spread) to 3.15% (plus the Hera credit spread). The transaction also provides for shifting the final maturity of the Bond from 8 August 2027 to 8 August 2034, it being understood that from 2016 until maturity, the continuation rate will remain 4.85% plus the credit spread.

Hera Spa's long-term ratings are confirmed as A2 negative from Moody's and A-negative from Standard & Poor’s. The Group intends to continue to commit itself to maintain these outstanding ratings in the future.

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