15 October 2008 - Following a recommendation by the Ljubljana Stock Exchange, we hereby announce a short statement summarizing the way in which Mercator Group is dealing with and adapting to the current unfavorable conditions in the financial markets.
The impact of financial crisis on Mercator Group operations
Financial crisis that broke out a good year ago in the United States has not subsided to this day. Although it initially only affected the financial sector, recent months have seen the first negative effects in the real sector as well.
- Mercator's short-term solvency is high and remains unchanged
In 2008, Mercator's operations have remained consistent with the business plan, as they have not been affected negatively by the financial crisis. Trade (particularly in alimentary or, fast-moving products) appears to be less sensitive to the volatility of the economic conditions than some other industries. Furthermore, revenues from retail represent the better part of the operating revenues and the majority of these revenues relates to immediate cash payments of our customers, generating a reliable daily cash inflow. In addition, the volatility of the amount of such cash flow is low and easily predictable. In Mercator, we have prepared a bundle of measures to alleviate the negative effects as early as in the beginning of 2008. Appropriate preventive measures implemented in the beginning of the year, and high cash flow from regular operations, have resulted in adequate solvency that enables us to settle any liabilities to business partners by due deadlines.
- Mercator's long-term solvency is sound
Mercator has thus far pursued a conservative financial policy in order to wall the company in from the occasional turmoil in the financial sector. On the one hand, Mercator maintains a 90 percent long-term coverage of long-term assets and finances net current assets with short-term bank loans. On the other hand, the company maintains the refinancing risk at a low level, looking to keep the ratio between long-term and short-term financial liabilities at approximately 70 to 30 percent. To a certain extent, minor exposure to these risks is also the result of conservative capital composition of the Mercator Group with the ratio between ownership and debt capital amounting to 1:1.13 as at June 30th 2008.
- Investment plans implemented consistently with the medium-term business plan
In 2008, Mercator is planning to invest over EUR 300 million into expansion of its core activities; the way for unimpeded implementation of the investment plan is paved by the current immunity of the Group's financial operations to the financial crisis. In recent years, Mercator financed over 55 percent of its investment with own resources generated either as net cash flow or by disinvestment from commercially unviable assets. In the years to come, Mercator is planning its investments consistently with the adopted medium-term business plan for the period 2008-2012, with the amount invested totaling between EUR 220 million and 270 million.
- Mercator's access to international financing sources is not restricted
Since Mercator is operating in the markets of SE Europe, the Group has worked for a number of years with banking groups that are present in this region. While most Mercator's financial liabilities are related to bank loans, financial lease has also been used in the recent years as a way to finance our expansion; thus, the number of our financial partners has increased. By expanding into new markets, Mercator is becoming interesting to new investors who appear to be willing to finance Mercator's investments even in the time of a global financial crisis. Since 2007, we have been studying some financing sources that we shall make use of if the financial crisis persists for an extended period of time, thus securing the assets required to effect the planned investments.
- Interest rate hedging has had a positive impact on the growth of financing costs
Recent years have witnessed an increase in variable interest rates, which affected Mercator through the resulting increase in financial expenditures. However, we used as early as in 2006 the interest rate swaps and free collars to hedge the risks of increasing financing costs. Thus, over 40 percent of Mercator's financial liabilities have either a fixed or hedged interest rate; as a result, Mercator's financial expenditures have not increased in this segment of financial liabilities. Remaining financial liabilities have variable interest rates which have risen by over 25 percent in the last year. On the other hand, we have observed, particularly in recent few months, the increase in interest rate margins, which is mostly the result of impaired liquidity of commercial banks and rising lack of confidence in the interbank markets. The commercial banks appear to have responded to these conditions by shifting the higher costs of the interbank loans to the real sector.
Current unfavorable conditions in global financial markets do not considerably affect the current operations of the Mercator Group. The Group continues to successfully pursue the adopted business plan for 2008. In the business plan for 2009, the Management Board will consider all relevant aspects in the economic environment, including the situation in global financial markets and other economic conditions. Hence, the 2009 Business Plan will also include a Management Board's estimate of whether the new economic conditions will affect to a significant extent the implementation of the medium-term business plan for the period until 2012. Currently, the forecast of future conditions in the global financial markets and the estimate of the extent of consequences for the real sector are too uncertain to allow any reliable statement about the potential effects of the global financial crisis and related changes in the economic conditions on Mercator Group's operations in the medium term. In any case, the Management Board will continue to prepare and implement measures to restrict the negative effects of the changed economic conditions on the operations of the Mercator Group in order to successfully pursue the planned business strategy.