We require funding to finance our growth and ambitious capital expenditure program. We are therefore dependent on the financial sector remaining stable and liquid. The Messer Group is reliant on cash flows from operating activities to repay debt. This is dependent to a large extent on the ability to generate positive cash flows from operating activities.
The Group has recognized goodwill in the consolidated balance sheet. The application of IAS 36 (i.e. the performance of impairment tests) could result in the requirement to recognize impairment losses on goodwill, if the business and market prospects of a group subsidiary or cash-generating unit deteriorate compared to the original date of measurement. Impairment losses could have a significant adverse impact on earnings and on balance sheet/ performance ratios. In China, the steel industry is in a State-run restructuring process which may lead to the closure of individual production sites. The resulting uncertainties were taken into account in the forecast through corresponding allowances on receivables and scaled-back business assumptions.
There is always a risk that financial and debt crises could result in global economic downturns or slowdowns. The Messer Group will continue to observe developments very closely. Cost reduction measures and capital expenditure programs initiated and implemented in recent years have helped to counter the negative impact of previous financial and economic crises. Many of these programs remain in place. A potential deterioration in the creditworthiness of our customers increases the risk of bad debts and delays in joint projects.
It is essential that we ensure compliance with the covenants attached to the USPP and RFA financing arrangements. Particularly worthy of mention is the net debt (i.e. gross debt less liquid funds)/EBITDA covenant which is required to be complied with for the Messer Group as a whole and for the Messer Group excluding its subsidiaries in China. Financial risks can also arise for the Messer Group from changes in exchange and interest rates. The management of interest rate, currency and liquidity risks is handled by Group Treasury in compliance with guidelines approved by executive management. Group Treasury identifies, measures and hedges financial risks. The Messer Group currently employs marketable forward currency contracts, interest rate swaps and cross-currency interest rate swaps as hedging instruments. Treasury guidelines contain general risk management principles and specific rules for defined areas such as the exchange rate risk, interest rate risk, the use of derivative financial instruments and the investment of surplus cash. The related risks are observed continuously and the scope of hedging adjusted where considered necessary.