Risks and mitigation
TMK is exposed to various financial risks. The Company seeks to ensure that all of its operations are adequately controlled to mitigate risks. Controls have been implemented at all management levels. Operational management at TMK ensures efficient functioning of internal control systems.
The negative market reaction on deteriorating global financial situation may have an adverse impact on liquidity, borrowing costs, the availability of credit lines and lead to unavailability of financing on acceptable terms.
Improving the structure of the loan portfolio, and optimizing financial activities, remain TMK's top priority tasks. The company keeps actively working on maintaining sufficient liquidity and improving the loan portfolio's structure, particularly by agreeing to extend loan terms, and reducing interest rates.
Compliance with covenants
TMK’s certain loan agreements and public debt securities currently include financial covenants. Some covenants are set in relation to leverage, total indebtedness and tangible net worth, and impose financial ratios that must be maintained. Other covenants impose restrictions in respect of certain transactions, including restrictions in respect of financial borrowing.
TMK strictly maintains incurrence covenants under its public debt securities and covenants under loan agreements. Historically, TMK has successfully secured from the relevant lenders all necessary waivers or standstill letters to address possible breaches of financial covenants.
Interest rate risk
Interest expenses are the prevailing part of finance costs of TMK. The cost of funding for Russian and international banks may increase in the future, which can increase the Company’s interest expense and adversely affect its financial position.
TMK is constantly taking the necessary steps to reduce the effect of interest rate fluctuations; including but not limited to, effective management of the structure and cost of funds, as well as reducing interest rates on loans that were taken out earlier.
TMK’s products are typically priced in Roubles for Russian sales and in U.S. dollars and Euros – for CIS, U.S. and other international sales. TMK’s direct costs, including raw materials, labour and transportation costs are largely incurred in Roubles and U.S. dollars. Other costs, such as interest expense, are currently incurred largely in U.S. dollars and roubles, and capital expenditures are incurred principally in Roubles, Euros and U.S. dollars. Rouble remains volatile.
TMK optimizes the loan portfolio's currency structure, so that the cash inflows and outflows in foreign currencies are more or less consistent. In case of unfavorable foreign exchange rates, the company may increase the extent to which assets and liabilities, and income and expenses for currency terms, correspond (economic risk hedging).
Main TMK offices are located in the Russian Federation, and most of their expenses are nominated in Russian Rubles. TMK's businesses are affected by inflationary pressures for raw materials, transportation, electricity, labour expenses.
The negative influence of high inflation rates in Russia is partially offset by the portion of TMK's sales of products with high added value.