rate. The proportion of these loans that the Group has chosen to hedge to fixed interest rate is presented in the graph below. The duration of the hedge is 17 months.
Calculated on an overall increase of market rates by 100 basis points (1 percentage unit), the interest costs of the Group would increase according to the bar chart below.
In total this means that the Group has a comparably low interest risk.
Market risk
Market risk is defined as the risk for changes in the value of a financial instrument due to changed market prices. This applies only to financial instruments that are listed or otherwise traded, which for Alfa Laval concern bonds and other securities and other long-term securities totalling SEK 96 (45) million. The market risk for these is perceived as low. For other financial instruments, the price risk only consists of currency risk and interest risk.
Liquidity risk and refinancing risk
Liquidity risk is defined as the risk that the Group would incur increased costs due to lack of liquid funds.
Refinancing risk is defined as the risk that the refinancing of maturing loans becomes difficult or costly. The loans of the Group are mainly long term and only mature when the agreed loan period expires. This means that the Group during the foreseeable future does not need to refinance maturing loans. Since the maturity of the loans is distributed over time the refinancing risk is reduced.
In 2006 Alfa Laval made a private placement in the US. The offer was over-subscribed and was closed at USD 110 million with a maturity of 10 years. The loan was raised on April 27, 2006.
In connection with the acquisition of Tranter Alfa Laval signed a bilateral term loan with SHB of EUR 25 million, corresponding to SEK 275 million. The loan matures in December 2013.
Alfa Laval has a senior credit facility with a banking syndicate of EUR 268 million and USD 348 million, corresponding to SEK 5,657 million. At December 31, 2008, SEK 2,196 million of the facility were utilised. The facility matures in April 2012.
In summary the maturity structure of the loans is: (see below)
Cash flow risk
Cash flow risk is defined as the risk that the size of future cash flows linked to financial instruments is fluctuating. This risk is mostly linked to changed interest and currency rates. To the extent that this is perceived as a problem, different derivative instruments are used to fix rates. See description of exposure and hedging measures under interest risk.
Counterpart risks
Financial instruments that potentially subject the Group to significant concentrations of credit risk consist principally of cash, deposits and derivatives.
The Group maintains cash and bank and short and long-term investments with various financial institutions approved by the Group. These financial institutions are located in major countries throughout the world and the Group’s policy is designed to limit exposures to any one institution. The risk for a counterpart not fulfilling its commitments is limited through the selection of financially solid counterparts and by limiting the engagement per counterpart. The Group performs periodic evaluations of the relative credit standing of those financial institutions that are considered in its investment strategy. The Group does not require collateral on these financial instruments.
The Group is exposed to credit risk in the event of non-performance by counterparts to derivative instruments. The Group limits this exposure by diversifying among counterparts with high credit ratings and by limiting the volume of transactions with each counter party.
In total it is the Group’s opinion that the counterpart risks are limited and that there is no concentration of risk in these financial instruments.
Operational risks
Risk for bad debts
The risk for bad debts is referring to the risk that the customer cannot pay for delivered goods due to financial difficulties. The Group sells to a large number of customers in countries all over the world. That some of these customers from time to time face payment problems or go bankrupt is unfortunately part of reality in an operation of Alfa Laval’s magnitude. All customers except Tetra Laval represent less than 1 percent of net sales and thereby represent a limited risk. Alfa Laval regularly collects credit information on new customers and, if needed, on old customers. Earlier payment habits have an impact on the acceptance of new orders. On markets with political or financial risks, the Group strives to attain credit insurance solutions. Accounts receivable constitutes the single largest financial asset according to Note 12. With reference to the above description it is management’s opinion that there is no material concentration of risk in this financial asset.
The amount of accounts receivable being overdue is an indication of the risk the company runs for ending up in a bad debt situation.
The Group’s costs for bad debts and the overdue in per cent of accounts receivable are presented in the following graph.
Risk for claims
The risk for claims refers to the costs Alfa Laval would incur to rectify faults in products or systems and possible costs for penalties. Alfa Laval strives to minimize these costs through an ISO certified quality assurance. The major risks for claim costs appear in connection with new technical solutions and new applications. The risks are limited through extensive tests at the manufacturing site and at the customer site. The Group’s net claim costs and their relation to net sales are found in the following graph.
Risk connected to technical development
This risk refers to the risk that some competitor develops a new technical solution that makes Alfa Laval’s products technically obsolete and therefore difficult to sell. Alfa Laval addresses this risk by a deliberate investment in research and development aiming at being in the absolute frontline of technical development.
Economic risk
Competition
The Group operates in competitive markets. In order to address this competition the Group has for instance:
  • organized the operations into divisions based on customer segments in order to get a customer focused market penetration,
  • a strategy for acquisition of businesses in order to for instance reinforce the presence on certain markets or widen the Group’s product offering,
  • worked with creating a competitive cost level based on its international presence and
  • worked with securing the availability of strategic metals and components in order to maintain the ability to deliver.
Business climate
In an overall economic downturn the Group tends to be affected with a delay of 6 to 12 months depending on customer segment. The same applies with an economic upturn. The fact that the Group is operating on a large number of geographical markets and within a wide range of customer segments means a diversification that limits the effects of fluctuations in the business climate. Historically, fluctuations in the business climate have not generated decreases in orders received by more than 10 percent.
Prices of raw material
The Group depends on deliveries of stainless steel, carbon steel, copper and titanium etc for the manufacture of products. The prices in some of these markets are volatile and the supply of titanium has occasionally been limited. There are a limited number of possible suppliers of titanium. The risk for severely increased prices or limited supply constitutes serious risks for the operations. The possibilities to pass on higher input prices to an end customer vary from time to time and between different markets depending on the competition. The Group is addressing this risk by securing long-term supply commitments and through fixed prices from the suppliers during six to twelve months. During both 2007 and 2006 the Group has experienced higher prices for many raw materials, but in particular for stainless steel, carbon steel, copper and titanium. During 2008 the prices have instead fallen sharply. The price volatility for the most important metals is presented on the next page: