Mercedes 2015 Annual Report Download - page 143

150 B | COMBINED MANAGEMENT REPORT | RISK AND OPPORTUNITY REPORT
flows and profitability. In recent years, the limit methodology
for exposures with financial institutions has been continually
further developed in order to counteract the diminished
creditworthiness of the banking sector since the financial crisis.
In connection with investment decisions, priority is placed
on the borrower’s very high creditworthiness and on balanced
risk diversification. Most liquid assets are held in investments
with an external rating of A or better.
Country risks
Daimler is exposed to country risks that primarily result from
cross-border financing for Group companies or customers
as well as from investments in subsidiaries and joint ventures.
Country risks also arise from cross-border cash deposits at
financial institutions. The Group addresses these risks by setting
country limits (e.g. for cross-border financing of customers
and for hard-currency portfolios from financial services compa-
nies) and through investment-protection insurance against
political risks in high-risk countries. Daimler also has an internal
rating system that divides all countries in which it operates
into risk categories.
Further information on financial risks, risk-limiting measures
and the management of these risks is provided in E Note 32
of the Notes to the Consolidated Financial Statements.
Information on the Group’s financial instruments is provided
in E Note 31 of the Notes to the Consolidated Financial
Statements.
Risks and opportunities relating to pension plans
Daimler has pension benefit obligations, and to a lesser degree,
obligations relating to healthcare benefits, which are largely
covered by plan assets. The balance of pension obligations less
plan assets constitutes the balance total or funded status
for these employee benefit plans. The valuation of the pension
obligations and the calculation of net pension expense are
based on certain assumptions. Even small changes in these
assumptions such as a change in the discount rate could
have a negative or positive effect on the funded status in the
current financial year or could lead to changes in the periodic
net pension expense in the following financial year. The market
value of plan assets is determined to a large degree by devel-
opments in the capital markets. Unfavorable or favorable devel-
opments, especially relating to equity prices and fixed-interest
securities, could reduce or increase the value of plan assets. The
recently increased volatility of financial markets raises the
risks and opportunities relating to the valuation of both pension
obligations and plan assets. The legal situation in connection
with pension plans can in some countries lead to payment obli-
gations if underfunding of the plans in those countries has
to be offset. Further information on the pension plans and their
risks is provided in E Note 22 of the Notes to the Consoli-
dated Financial Statements.
Risks and opportunities from changes in credit ratings
Daimler’s creditworthiness is assessed by the rating agencies
Standard & Poor’s Rating Services, Moody’s Investors Service,
Fitch Ratings and DBRS. There are risks and opportunities
in connection with potential downgrades or upgrades to credit
ratings by these rating agencies. Downgrades could have a
negative impact on the Group’s financing if such a downgrade
leads to an increase in the costs for external financing or
otherwise restrict the Group’s ability to obtain financing. A credit
rating downgrade could also damage the company’s reputation
or discourage investment in Daimler AG. A risk to the credit rating
of the Daimler Group could also arise if the earnings and cash
flows anticipated from the Group’s growth could not be realized.
Credit rating upgrades could lead to lower borrowing costs
for the Group and also facilitate its access to financing sources
on the money and capital markets. If the positive development
of the Group should continue and its cash flow and profitability
should also develop positively, opportunities could arise for
an upgrade of the credit rating on the part of the rating agencies.
Risks from guarantees, legal and tax risks
The Group continues to be exposed to risks from guarantees
and legal risks. Provisions are recognized for those risks if and
insofar as that they are likely to be utilized and the amounts
of the obligations can be reasonably estimated. In 2015, the risk
and opportunity management system was expanded to include
tax risks. No quantitative assessment of tax risks is carried out.
Risks from guarantees
Issuing guarantees results in liability risks for the Group.
For example, Daimler holds an equity interest in the system
for recording and charging tolls for the use of highways in
Germany by commercial vehicles. The operation of the electronic
toll-collection system is the responsibility of the operator
company, Toll Collect GmbH, in which Daimler holds a 45% stake
and which is included in the consolidated financial statements
using the equity method of accounting. In addition to Daimler’s
membership of the Toll Collect consortium and its equity
interest in Toll Collect GmbH, risks also arise from guarantees
that Daimler Financial Services AG has assumed with the
other partners in the Toll Collect consortium (Deutsche
Telekom AG and Cofiroute S.A.) supporting obligations of Toll
Collect GmbH toward the Federal Republic of Germany in
connection with the toll system and a call option of the Federal
Republic of Germany. Claims could be made under those
guarantees if toll revenue is lost for technical reasons, if certain
contractually defined performance parameters are not ful-
filled, if additional claims are made by the Federal Republic of
Germany, if the final operating permit is not granted, if Toll
Collect GmbH fails to meet contractual obligations, if it fails
to have the required equipment available, or if the Federal
Republic of Germany takes over Toll Collect GmbH. The maximum
loss risk for the Group from these risks can be substantial.
Additional information is provided in E Note 29 (Legal proceed-
ings) and E Note 30 (Financial guarantees, contingent
liabilities and other financial commitments) of the Notes to
the Consolidated Financial Statements.