Active risk management plays a central role in NORDEN’s strategy to ensure stable earnings. It is NORDEN’s policy to only assume material risks in relation to the freight markets and related risks (commercial risks). Other risks are reduced to the greatest possible extent either through diversification, guarantees or by hedging the exposure when future risks are known.
The framework and objectives governing NORDEN’s risk management are set out and approved annually by the Board of Directors. The Executive Management is responsible for identifying material risks and developing the Company’s risk management. Exposures and the utilisation of the framework are reported to the Board of Directors on a monthly basis.
NORDEN’s activities expose the Company to a number of risk factors, the most significant of which are assessed to be:
- Freight rate volatility, affecting ship values and earnings from vessel capacity.
- Credit risk on customers in relation to cargo and T/C contracts as well as banks and yards in relation to deposits and prepayments on newbuildings, respectively.
The current low freight rates reduce the earnings capacity while the drop in the fleet value has a negative impact on the Company’s equity. As some of the Company’s contracts are entered into with other shipping companies, the credit risk in relation to these increases due to the poor market. In addition, it is assessed that the operational risk has increased due to the low freight rate level as many ship owners economise on maintenance. Overall, it is assessed that the markets in which NORDEN operates have become riskier in general.
In spite hereof, NORDEN’s overall risk – measured as the sensitivity in case of a 10% drop in freight rates and vessel prices compared to the Net Asset Value (NAV) – is lower at the end of 2012 compared to year-end 2011. This is due to the Company’s low financial gearing and high coverage. Through the sale of vessels and by entering into cargo contracts, the Company has sought to limit the risk throughout the year.