As a corporate group that operates internationally, and due to our presence in the capital market, we are exposed to various financial risks and opportunities. Above all, these are liquidity and counterparty risks, financial market risks and opportunities, risks of fluctuations in the market values of operational tangible and intangible assets, as well as risks and opportunities from pension obligations.
Risk and opportunity management in relation to the use of financial instruments
In the area of financial risks and opportunities, we use an active management strategy to reduce the effects of fluctuations in exchange and interest rates. The management of financial risks and opportunities by using derivatives is regulated by extensive guidelines. Speculation is prohibited. Derivative transactions are subject to constant risk controls. The strict separation of functions between trading, settlement, and control functions is ensured.
To ensure its continued existence, a company must be able to always fulfill its commitments from operating and financial activities. Therefore, to reduce potential liquidity risks, we have a central Group-wide liquidity management system in place, and a balanced maturity profile. The maturities of our financial liabilities are aligned with our planned free cash flow. Furthermore, we have a syndicated loan facility of € 2 billion with a term until 2025, which ensures continuing solvency if any liquidity bottlenecks occur. As our loan agreements do not contain any financial covenants, these agreed lines of credit can be accessed even if our credit rating should deteriorate. Additionally, we have a commercial paper program with a maximum volume of € 2 billion.
Counterparty risks arise from the potential default by a partner in connection with financial investments, loans, and financing commitments on the one hand and receivables in operating business on the other.
As for counterparty risks from financial transactions, we review all central positions relating to trading partners and their credit ratings daily. We manage financial risks of default by diversifying our financial positions and through the related active management of our trading partners. Significant financial transactions involving credit risk are entered into with banks and industrial companies that have a good credit rating. Moreover, our large banking syndicate – the syndicated loan facility of € 2 billion was syndicated amongst 19 banks – reduces possible losses in the event of default.
The solvency and operational development of trading partners are regularly reviewed as part of the management of operational counterparty risks. Sovereign risks are also analyzed. The volume of receivables of each customer is capped in line with their credit ratings. Risk-mitigating measures, such as credit insurance, are utilized as appropriate. Nevertheless, defaults by isolated trading partners, even those with outstanding credit ratings, cannot be entirely ruled out, although rated as unlikely (further information can be found in “Credit risks” in the Note “Management of financial risks” in the Notes to the Consolidated Financial Statements).
Counterparty risk is classified as a possible risk with a moderate effect.
Financial market risks and opportunities
As a result of our international business activities and global corporate structure, we are exposed to risks and opportunities from fluctuations in exchange rates. These result from financial transactions, operating receivables, and liabilities, as well as forecast future cash flows from sales and costs in foreign currency. We use derivatives to manage and reduce these risks and opportunities (further information can be found in the Note “Derivative financial instruments” in the Notes to the Consolidated Financial Statements). Foreign exchange rate risks are rated as possible with a potential substantial effect on the net assets, financial position, and results of operations.
Variable interest and current financial liabilities are exposed to the risks and opportunities of interest rate fluctuations. These are also managed and reduced using derivatives. Interest rate risks have a potentially negative impact, are considered possible, and pose an immaterial risk overall.
Risks of impairment of balance sheet items
The carrying amounts of individual balance sheet items are subject to the risk of changing market and business conditions and thus to changes in fair values as well. Necessary impairments could have a significant negative non-cash impact on earnings and affect the accounting ratios. This applies in particular to the high level of intangible assets including goodwill, which mainly derive from the purchase price allocations made in connection with past acquisitions (further information can be found in the notes “Goodwill” and “Other intangible assets” in the Notes to the Consolidated Financial Statements). All relevant risks were assessed during the preparation of the Consolidated Financial Statements and were taken into account accordingly. We rate risks beyond this as improbable with a potential critical impact.
Risks and opportunities from pension obligations
We have commitments in connection with pension obligations. The present value of defined benefit obligations can be significantly increased or reduced by changes in the relevant valuation parameters, for example the interest rate or future salary increases. Pension obligations are regularly assessed as part of annual actuarial reports. The obligations are covered by the pension provisions reported in the balance sheet based on the assumptions as of the balance sheet date. Some of these obligations are funded by plan assets (further information can be found in the Note “Provisions for pensions and other post-employment benefits” in the Notes to the Consolidated Financial Statements). To the extent that pension obligations are covered by plan assets consisting of interest-bearing securities, shares, real estate, and other financial assets, decreasing or negative returns on these assets can adversely affect the fair value of plan assets and thus result in further additions to pension provisions. By contrast, rising returns increase the value of plan assets, thereby resulting in excess cover of plan liabilities. We increase the opportunities of fluctuations in the market value of plan assets on the one hand and reduce the risks on the other by using a diversified investment strategy. The possible risk due to pension obligations could have minor effects on the net assets, financial position, and results of operations.
Assessment by independent rating agencies
The capital market uses the assessments published by rating agencies to help lenders assess the risks of a financial instrument used by our company. We are currently rated by Standard & Poor’s, Moody’s, and Scope. Standard & Poor’s has issued a long-term credit rating of A with a stable outlook, Moody’s a rating of A3 with a stable outlook, and Scope a rating of A- with a positive outlook. In line with market procedures, our financing conditions are closely tied to our rating. The better the rating, the more favorably we can generally raise funds on the capital market or from banks.