Financial Risk

The varied geographical distribution of Pirelli production and commercial activities entails exposure to transaction and translation exchange rate risk.

Below are the ramifications (all other conditions being equal) on the consolidated equity of a hypothetical appreciation/depreciation of below-mentioned currencies against the euro (Currency translation risk):

A five-year revolving credit facility for euro 1.2 billion was obtained in November 2010. Euro 815 million of that facility had been used at June 2012. In February 2011, the placement of an unrated bond issue worth a nominal euro 500 million was successfully concluded with international institutional investors on the Eurobond market (5.125% coupon and maturity February 2016). Promptly seizing the best financing opportunities to provide continuous support for business growth in the face of volatile financial markets and restricted access to credit, the Board of Directors approved the issuance of non-convertible bonds up to a maximum nominal total of euro 800 million (or the same countervalue in other currencies), which could also be placed in several tranches on international markets. These bonds may also be issued by other Group companies and secured by Pirelli & C. S.p.A. The bonds may be placed exclusively with professional investors.

Below is the Pirelli debt structure as of June 30,2012.

Fluctuations in interest rates impact the market value of Group financial assets and liabilities and net financial expenses.

Group policy is to attempt to maintain the following ratio between fixed rate and variable rate exposures: 65% fixed and 35% variable.

The Group makes derivative contracts, typically interest rate swaps, in order to maintain this target ratio.

Below are the ramifications (all other conditions being equal) on the net profit (and directly on equity) of a change (increase/decrease of 0.50%) in the level of interest rates of all currencies to which the group is exposed.

Please refer to the paragraph “risks and uncertainties” of 2011 annual financial report for further details regarding financial risks and their management policies.