Risk Management

Since its foundation, Koç Group has achieved long-term success through its cautious and robust approach toward risk management. In the future, it will reinforce its awareness of risk, transparency and financial discipline and conduct proactive risk management. Towards this end, Koç Holding uses sophisticated risk assessment, modeling, reporting, and capital allocation techniques. These processes boost transparency and encourage the application of a more systematic approach to risk assessment in investment and business decisions at all levels.

At Koç Group, risks are managed with the oversight of the Board of Directors, in coordination with all Group presidents. Koç Holding’s Risk Management function was established to further develop the Group’s risk policies, limits and review mechanisms. This risk function leverages the risk infrastructures in each of the Company’s businesses, which have adopted an approach that is aligned with the Group’s overall risk policies and limits.

Risks identified through risk management processes are prioritized depending on their probability and impact. It is ensured that most important risks are within the responsibilities of business leaders at Company and/or Group level. For managing risks, the Company has general response strategies, which identify categories according to whether it will avoid, transfer, reduce or accept the risk. These response strategies are tailored to ensure that risks are within acceptable tolerance levels set by the Board of Directors.

Major risks that Koç Holding is exposed to are classified under four main categories:

Financial Risks

Financial risks relate to a company’s ability to meet its financial obligations and mitigate effects of market volatility. To keep financial risks under control, a variety of financial indicators, especially Net Financial Debt/EBITDA, Net Foreign Currency Position/Shareholders’ Equity, current ratio and the maturity profile of financial liabilities, are monitored, at the Company and Group level on a combined and consolidated basis, and are kept within particular limits. Financial risks are broken down into five main categories:

Foreign Currency Risk: Koç Group keeps its foreign currency exposure within certain limits. As a foreign currency risk management tool, derivative transactions are used when needed.

Liquidity Risk: In accordance with the management of the liquidity risk, the Group continues to diversify its funding sources, increases the average duration of its financial liabilities, maintains a sufficient level of cash and cash equivalents and keeps the current ratio above a certain limit in case of a sudden cash need. The upgrade of Turkey’s credit rating and the fall in interest rates have made international bond financing advantageous. The first Koç Holding Company to take advantage of the diversification of funding sources was Tüpraş and a Eurobond issuance of US$ 700 million with a maturity of 5.5 years took place in 2012. Similarly, in 2013, Arçelik and Koç Holding issued a US$ 500 million 10-year and a US$ 750 million 7-year Eurobond, respectively.

Credit Risk: The Company mitigates this risk with conducting credit analysis, setting credit limits and by obtaining the maximum amount of guarantee. It also leverages the Group’s credit intelligence across different markets using a risk management program (E-risk commercial risk application), which works to minimize the negative impact of market fluctuations.

Interest Rate Risk: In order to manage interest rate risk, Koç Group implements asset liability management and employs certain derivative financial instruments when necessary.

Commodity Price Risk: The Company accepts commodity price risk where they are part of its core business and avoid or reduce exposure where possible through a variety of hedging mechanisms.

Strategic Risks

Strategic risks relate to the demand for the Company’s products and services, market regulations as well as factors that affect market share such as competition, technological changes, and consumer trends and product innovation.

The most effective way to reduce risks related to sales is to diversify markets sectorally and geographically. As a long term risk management strategy, Koç Holding is increasing its both sectoral and geographical diversification. In the short term, macroeconomic and sector specific developments are monitored centrally by the president of each group. Koç Holding’s strong presence and diversified business lines in the national economy enables it to recognize market changes early and take rapid and coordinated measures.

Operational Risks

Operational risks include incidents that effect the Company’s operations such as earthquakes, fires and environmental accidents, as well as the integrity of its internal systems and processes. Insurable risks are frequently re-assessed and transferred out of the Group based on a cost-benefit analysis. To ensure the proper functioning of internal systems and processes, the Audit Group Presidency operates under the Chairman of the Board of Directors in accordance with the principle of separating execution and audit tasks. The Audit group Presidency performs risk and fraud audit of financial and operational processes at Koç Group companies.

Legal Risks

Koç Holding has developed various systems against potential legal risks. These systems, which form an online database developed for the purpose of early warning, include the intellectual property rights management program (mari@a sistem), the legal compliance test (HUY) and contract management system (LERİMAN).

Risk Management Committee Activities

In 2012, a Risk Management Committee was set up for the purpose of ensuring compliance with Article 378 of the Turkish Commercial Code, which went into effect on 1 July 2012, and the effective operations of the committees working under the Board of Directors, implementing whatever measures are necessary for early detection of risks and managing those risks. Independent Board of Directors’ member Muharrem Hilmi Kayhan was appointed Chairman of the Risk Management Committee, a position he still holds. The other Committee member is Temel Kamil Atay, a member of the Board of Directors.

The Committee had six meetings in 2013. It has evaluated the Koç Holding Risk Management System and the principles of risk reporting, and analyzed the risk reports prepared within this framework, as wells as made recommendations for measures to be taken to address matters that do not conform to designated limits in the Risk Management System. Reports and committee assessments are periodically provided to the Board of Directors.