Risk Policy

1) Introduction

Metalfrio Solutions S.A. and controlled companies thereof (Company) are exposed to financial risks arising out of its operations and market conditions, which may affect the market value of assets and liabilities, cash flows, future results and consolidated financial position of Company.

In order to mitigate main financial risks, Company shall act within the limits established in this policy, and may contract specific financial instruments, in compliance with limits set forth herein.

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2) Purposes

The following are the purposes of this Policy:

  • Establish directives, limits, attributions and procedures to be adopted by Company in the performance of activities implying in financial risks;
  • Enhance hiring processes, control, accountability, evaluation and monitoring of financial transactions exposed to risks;
  • Create a Team of Financial Risk Management (the “Risk Management Team”) designed to ensure the compliance of Policy of Financial Risk Management in Company.

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3) Attributions

The following are attributions, definition, application and monitoring of this Policy:

  • The Board of Directors shall be responsible for: (i) approving the Policy and all updates thereof, (ii) participate in the decision of any matter not described herein and (iii) decide on the course of action in events of unfitting.
  • For its application, a Risk Management Team shall be created and be responsible for ensuring the compliance of the Policy for Financial Risk in Company and for the following-up to the Board of Directors for approval any exception or unfitting to this Policy. Such Team shall be comprised of the following:
    • Chairman of Board of Directors
    • President of Company
    • Global Vice-President of Operations
  • The Risk Management Team shall meet on a monthly basis to evaluate limits established. Matters concerning such meeting shall be abridged in minutes, which shall be spread among members of the Board. Moreover, a consolidated summary of financial applications and respective profitability shall be presented on a three-month basis to the Board.

    The Chief Financial Officer shall act as a secretary for the committee.

  • The Finance Directorship shall be responsible for acting within the limits of this Policy, following-up exposure levels of Company and complying with limits established. Moreover, the Finance Directorship shall inform to Risk Management Team and the Board of Directors on the unfitting of any of exposure limits preestablished in this Policy.

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4) Description of Financial Risks

The main financial risks to which Company is exposed are the following:

4.1. Exposure to interest rate fluctuations

Variations on market interest rates may impact the market value of assets and liabilities, the results and cash flows associated to assets and liabilities linked to fixed and variable rates. The main rates to which Company is exposed are: TJLP, CDI, Libor and Euribor.

4.2. Exposure to variations on foreign exchange rates

Company holds assets, liabilities and results denominated in different functional currencies, including Brazilian Real, US Dollar, Danish Crown, Mexican Peso, Turkish Lira, Rublo and Euro, thus being exposed to risks related to the variation of the foreign exchange of such currencies. The exposure may be divided into:

    Variation between functional currencies of Company (and each one of subsidiaries) and currencies of respective assets and liabilities

  • Payables or receivables from third parties that may generate variations in the amount of assets and liabilities, as well as revenues or expenses from the foreign exchange variation in the results and variations in cash flows.
  • Payables or receivables between related companies that may generate variations in the amount of assets and liabilities, as well as revenues or expenses from the foreign exchange variation in the results and variations in cash flows.
  • Variation between the functional currency of subsidiaries and Brazilian Real

  • Permanent investment in subsidiaries that may generate variations in the amount of Consolidated Shareholders’ Equity (conversion of balance sheet).

4.3. Exposure to credit risk

It arises from the possibility of Company and controlled companies to suffer losses related to the default of its counterparties, including:

  • Depositary financial institutions of funds or financial investments;
  • Investments in debt bonds issued by other entities upon the purchase of fixedincome papers;
  • Investments in Public Bonds;
  • Funds and investments (managed by third parties);
  • Counterparty in transactions involving over-the-counter derivatives;
  • Transactions with related parties.

4.4. Exposure to variations on commodities prices

Company uses commodities in the production process, mainly copper and aluminum. Adverse variations on prices of copper and aluminum and other commodities used by Company may affect the results and cash flows.

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5) Management of Financial Risks

The parameters of financial risks Company is authorized to operate and manage are the following:

5.1. Exposure to interest rate fluctuations

Policy

Company is not subject to limitations on exposure to different interest rates, nor to the maximum or minimum levels for the relation between exposure to fixed and variable rates.

Company is authorized to contract hedge financial instruments (derivatives) to cover such exposure, if deemed necessary.

Monitoring

The Finance Directorship shall timely follow-up fluctuations of market interest rates, and inform at least on a monthly basis to Risk Management Team, which may decide for the use or non-use of hedge instruments. If they decide for the use thereof, Company may contract hedge transactions against the volatility of such rates.

5.2. Exposure to variations on foreign exchange rates

Policy

Company is not required to hedge foreign exchange exposure, but is authorized to perform hedge transactions if deemed necessary.

Company is authorized to perform foreign exchange future transactions (Non Deliverable Forward and Deliverable Forward) and other instruments, in each currency, in the net notional value up to the maximum limit of 40% of Consolidated Shareholders’ Equity of Company reported for the tax year immediately previous to the contracting of such financial instrument. The 40%-limit previously mentioned should not be applied in events where financial instruments contracted are designed to hedge the foreign exchange exposure.

If the market fair value of operations contracted reaches a debt balance corresponding to 10% of Consolidated Shareholders’ Equity of Company reported for the immediately previous tax year, the Board of Directors shall be informed so that an action plan is discussed and defined.

Monitoring

The Chief Financial Officer shall maintain a consolidated control of all pending transactions contracted, including, at least:

  • Description of transaction (call option / put option);
  • Subsidiary of company contracting such transaction;
  • Type of transaction (Non Deliverable Forward, Deliverable Forward, Options);
  • Counterparty;
  • Put and call currency;
  • Conditions: Notional value, contracted rate and maturity date;

In addition, the Chief Financial Officer shall review at least on a monthly basis the market fair value of transactions contracted and perform a sensibility analysis (spot rate and adverse oscillations 10%, 25% and 50%) to set forth the degree of exposure of Company. If the market is agitated, such monitoring could be daily.

The Chief Financial Officer shall monthly submit fitting indicators mentioned above to Risk Management Team and, in the event of unfitting, the Board should be immediately informed.

5.3. Exposure a credit risk

Policy

  • Depositary financial institutions of funds or financial investments

Company shall be abided for the following limits:

  • a) Company may apply in financial institutions with a risk rating, based at least in one of the three main agencies (Standard & Poors, Moody´s or Fitch) with a national-scale rating equal or above A-, since if funds maintained in a sole financial institution are simultaneously limited to (i) 50% of amount of Consolidated Shareholders’ Equity of Company reported for the immediately previous tax year and (ii) 50% of consolidated cash of previous quarter.

  • b) Company may apply in financial institutions with a risk rating, based at least in one of the three main agencies (Standard & Poors, Moody´s or Fitch) with a national-scale rating between BBB+ and BBB-, since if funds maintained in such group are limited to 25% of amount of Consolidated Shareholders’ Equity of Company reported for the immediately previous tax year and consolidated cash of previous quarter and those in a sole financial institution are simultaneously limited to (i) 5% of amount of Consolidated Shareholders’ Equity of Company reported for the immediately previous tax year and (ii) 5% of consolidated cash of previous quarter.

  • c) Company may apply in financial institutions without risk rating or with a risk rating, based at least in one of the three main agencies (Standard & Poors, Moody´s or Fitch) with a national-scale rating equal or less than BB+, since if funds maintained in such group are simultaneously limited to 5% of amount of Consolidated Shareholders’ Equity of Company reported for the immediately previous tax year and consolidated cash of previous quarter and those in a sole financial institution are limited to 3% of amount of Consolidated Shareholders’ Equity of Company reported for the immediately previous tax year and 3% of consolidated cash of previous quarter.

For computing the compliance of limits established for the financial institutions above, values guaranteed by Credit Guarantor Fund (FGC) or a similar body in other countries shall be considered as credit risk equivalent to BBB, once these represent a mitigation for credit risk of Company.

  • Fixed and variable income securities

Company may invest up to 10% of amount of Consolidated Shareholders’ Equity of Company reported for the immediately previous tax year in variable income securities. For such computation, investments in subsidiaries and shares held in treasury shall be excluded.

Company may invest in fixed income securities (for the purposes of Policy for financial risk management, CDBs/CDI are not considered as fixed income securities, but they are considered in the previous item as Depositary financial institutions) up to the limit of 75% of consolidated cash reported by Company in the previous quarter and in compliance with the following limits:

  • a) Company may maintain its funds applied in fixed income securities issued by Brazilian or foreign entities with a risk rating, based at least in one of the three main agencies (Standard & Poors, Moody´s or Fitch) with a global-scale rating and in the paper-denominated currency equal or above A-, since if funds maintained in a sole issuer are limited to 15% of amount of Consolidated Shareholders’ Equity of Company reported for the immediately previous tax year and 20% of consolidated cash of previous quarter.

  • b) Company may maintain its funds in fixed income securities issued by Brazilian or foreign entities with a risk rating, based at least in one of the three main agencies (Standard & Poors, Moody´s or Fitch) with a global-scale rating and in the paper-denominated currency between BBB+ and BBB-, since if funds maintained in a sole issuer are limited to 10% of amount of Consolidated Shareholders’ Equity of Company reported for the immediately previous tax year and 10% of consolidated cash of previous quarter.

  • c) Company may maintain its funds in fixed income securities issued by Brazilian or foreign entities without risk rating or with a risk rating, based at least in one of the three main agencies (Standard & Poors, Moody´s or Fitch) with a global-scale rating and in the paper-denominated currency under BBB-, since if funds maintained in a sole issuer are limited to 3% of amount of Consolidated Shareholders’ Equity of Company reported for the immediately previous tax year and 7.5% of consolidated cash of previous quarter.
  • Investment Funds

Company may maintain its funds in investment funds since if funds maintained in a sole investment fund are limited to 5% of amount of Consolidated Shareholders’ Equity of Company reported for the immediately previous tax year and 5% of consolidated cash of previous quarter.

  • Transactions with over-the-counter derivatives

Company may perform transactions with over-the-counter derivatives in financial institutions with a risk rating based at least in one of the three main agencies (Standard & Poors, Moody´s or Fitch) with rating in an applicable scale equal or above A-.

  • Trade receivables

The risk of trade receivables shall be monitored in accordance with a specific policy established by Company.

Monitoring

The Chief Financial Officer may monthly follow-up the fitting of limits above defined and monthly report to “Risk Management Team” any unfitting.

5.4. Exposure to variations on commodities prices

Policy

Company is not required to hedge against possible variations on commodities prices, but is authorized to make hedge transactions if deemed necessary.

Company may contract financial instruments to obtain hedge of changes on prices of cooper, aluminum and other commodities with a price quotation in futures market, in compliance with the maximum limit of contracting financial instruments until 50% of volume of commodities provided to be used by Company within the next 12 months.

Monitoring

The Chief Financial Officer shall timely monitor the variation on prices of main used commodities and assess jointly with “Risk Management Team” the need for any hedge.

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6) Management of Debt and Financial Indicators

Company may seek to maintain a relation of at least 40% of financial debt on a longterm basis, with respect to the total of financial indebtedness.

Company may also meet the following financial indicators:

  • Net financial debt / Consolidated Shareholders’ Equity of last quarter within the maximum of 0.75. This indicator must be computed at the time of evaluation.
  • Minimum consolidated cash of R$ 50 million for operational needs plus a payable amount of bank debts maturing in the following quarter.

If financial indicators above are not meet, Company may immediately inform to “Risk Management Team” and Board of Directors.

Monitoring

Chief Financial Officer shall monthly monitor indicators and inform to “Risk Management Team” and to the Board of Directors any unfitting.

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7) Transactions with Related Parties

Company adopts practices recommended and/or required by applicable laws and standards of Regulation of New Market of BM&F Bovespa. The inclusion of this matter into this item is intended for the specific purpose to deal with loan financial transactions (intracompany loan) between the parent and its subsidiaries and other related parties.

Company (parent) and its subsidiaries (controlled companies) may perform financial transactions (intracompany loan / arm’s length transactions) with financial charges at market value.

When transactions with related parties are not between parent companies and/or controlled/affiliates, Company shall comply with the limit of 5% of consolidated Shareholders’ Equity of Company reported for the immediately previous tax year and a term not in the excess of 90 days. Transactions with related parties (except for transactions involving the parent and controlled/affiliates) shall be monthly submitted to the Board of Directors.

If financial indicators above are not met, Company may immediately inform to “Risk Management Team” and to Board of Directors.

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8) Other

Historically, Company has not been exposed to risks different from the ones previously described.

If Company intends to invest in financial assets or contract financial instruments not included in this Policy, Company shall submit to “Risk Management Team” for evaluation of amounts involved and associated risks, as well as the convenience and opportunity of contracting, and submit the matter to the Board of Directors if:

  • i) The maximum loss estimated of transactions is higher than 5% of consolidated Shareholders’ Equity of Company reported for the immediately previous tax year; or
  • ii) The maximum loss cannot be surely estimated.

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São Paulo, August 2010.

Luiz Eduardo Moreira Caio

Fernando Pedroso dos Santos

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