Mercedes 1998 Annual Report Download - page 67

ANALYSIS OF THE FINANCIAL SITUATION
63
FINANCING ACTIVITIES MARKED BY DISTRIBUTE-RECAPTURE
PROGRAM OF DAIMLER-BENZ. In 1998, changes in German tax
laws caused us to distribute € 3.8 billion of retained earnings
of Daimler-Benz AG, mostly generated during the high-earning
80’s, to stockholders. This resulted in an additional distribu-
tion in 1998 of € 10.23 (DM 20) per Daimler-Benz share. The
former Daimler-Benz stockholders received a total dividend
of € 5.3 billion which represents the retained earnings plus
the tax refund from the German fiscal authorities. In order
to restore our original balance sheet ratios, we subsequently
undertook a capital increase in the overall volume of € 3.8
billion by way of a rights offering. More than 90% of our stock-
holders participated in this offering.
The group’s funding requirements will be influenced by the
continued growth of the financial services business. To meet
this need and to optimize capital costs we are resorting primar-
ily to international money and capital markets. In 1998 we
again made use of asset backed securities to limit group debt
by securitizing receivables from leasing and sales financing.
CENTRAL REFINANCING MANAGEMENT. In the Daimler-
Chrysler Group, we will coordinate the funding of our opera-
tions on a centralized basis by using our regional holding
and finance companies to obtain funds in the money and
capital markets. Longer-term financing activities in the inter-
national capital markets will generally be carried out with
issues which are guaranteed by DaimlerChrysler AG. This will
ensure that we come to the financial markets with a consistent
credit standing, and therefore will obtain the most economical
funding for the Group.
CREDIT RATING AT A HIGH LEVEL. DaimlerChrysler AG is
rated by the international firms Moody’s Investors Service and
Standard & Poor’s for both short- and long-term borrowing. The
long-term borrowing ratings of A1 and A+ and short-term bor-
rowing with Prime-1 and A-1 are highly regarded internation-
ally. In fact, Moody’s short-term Prime-1 rating is the highest
category possible. Since DaimlerChrysler AG guarantees loans
issued by our group companies, they also benefit from our high
credit rating. As part of the business combination, Daimler-
Chrysler AG has guaranteed the outstanding long-term debt
obligations of the former Chrysler Corporation and Chrysler
Financial Company. Following this action, both rating organiza-
tions upgraded their ratings of these liabilities, whose long-
term rating was slightly below the referenced categories, to the
level of A1 or A+.
ACTIVE INTEREST MANAGEMENT. The liquid assets available in
the DaimlerChrysler Group are invested, partly in the money
markets and to a larger extent in the capital markets, with
a view to both the cash flow needs of the Group and the
optimization of returns. The division between the two investment
priorities (asset allocation) is the basis of our interest
management.
The investments in the capital markets are governed in accord-
ance with a risk limit established by the Board of Management
using the value-at-risk method. The instruments of modern
portfolio management are used to invest the liquid funds in
fixed-interest securities and stocks. In the asset and foreign
currency management, derivative financial instruments are
only used to hedge against market risks. For ongoing determi-
nation and tracking of investments and market values, as well
as results, we utilize a central front-end system.
In accordance with the guidelines established by the Bank for
International Settlements (BIS) on risk management in banks,
the trading divisions are separated organizationally, physically
and in their technical systems from the administrative func-
tions of settlement, financial accounting and controlling.
EURO INTRODUCED AS GROUP CURRENCY. After the bilateral
exchange rates between the currencies of the eleven participat-
ing states were established by the European Council of Heads
of States and Governments in early May 1998, the euro was of-
ficially introduced as the common currency on January 1, 1999.
Due to the global orientation of our activities, we wholeheart-
edly welcome this step and regard it as a definite opportunity
for our company. In the future, the benefits of productivity in-
creases in our goods and services manufactured in the euro
area will no longer be reduced by exchange rate fluctuations.
We have introduced the euro and replaced the D-Mark as the
group-wide currency on January 1, 1999. To this end, the
invoicing and reporting systems have been converted to euros.
The cost of the conversion incurred during the past years
totaled approximately € 100 million. These conversion costs
will be offset in the long term by annual savings of approxim-
ately € 50 million due to lower transaction and forward ex-
change cover costs.
HEDGING EXCHANGE RATE RISKS. The international orienta-
tion of our business activities results in streams of deliveries
and payments denominated in a variety of currencies. Gener-
ally, the exports from Germany exceed the imports invoiced in
other currencies, therefore, DaimlerChrysler is exposed to
exchange rate risks. The net exposure resulting after offsetting
exports and imports in the individual currencies is regularly
assessed in the context of central currency management and is
hedged with appropriate financial instruments on the basis of
continuously reviewed currency rate expectations. In the
process, the opposing currency risks of DaimlerChrysler
Corporation are netted against the currency risks of Daimler-
Chrysler AG. The net assets of the Group which are invested
abroad in subsidiaries and affiliated companies are not in-
cluded in the management of currencies.