Porsche 2009 Annual Report Download - page 110

second half of the year 2009. By diversifying when it
invests excess liquidity and by entering into financial
instruments for hedging purposes, the Volkswagen
group ensures that it remains solvent at all times,
even in the event of a default by individual counterpar-
ties.
Credit lines from banks are generally only
ever used within the Volkswagen group to cover short-
term working capital requirements. Projects are fi-
nanced by, among other things, loans provided at fa-
vorable interest rates by development banks such as
the European Investment Bank or the European Bank
for Reconstruction and Development (EBRD), but also
by national development banks, such as KfW or Banco
Nacional de Desenvolvimento Econômico e Social
(BNDES). This extensive range of options means that
any liquidity risk to the Volkswagen group is extremely
low.
Risks arising from financial instruments
Channeling excess liquidity into investments
exposes Volkswagen to counterparty risk. Partial or
complete failure by a counterparty to perform its ob-
ligation to pay interest and repay the principal would
have a negative impact on earnings and liquidity. The
Volkswagen group counters this risk through coun-
terparty risk management.
The financial instruments entered into for
hedging purposes hedge balance sheet risks in addi-
tion to counterparty risk. These balance sheet risks
are mitigated through hedge accounting.
Liquidity risk
A rating downgrade could adversely affect
the terms attached to the Volkswagen group’s bor-
rowings. One important factor in this context is
Volkswagen AG’s interest in Dr. Ing. h.c. F. Porsche
AG, which resulted in a high outflow of liquidity. To
maintain its existing ratings, Volkswagen AG an-
nounced a planned capital increase through the issue
of new preference shares for the first half of 2010.
Based on the proceeds from the capital increase and
its currently higher liquidity, the company does not
anticipate any liquidity risks.
Residual value risk in the
financial services business
In the financial services business, the Volks-
wagen group agrees in selected cases to buy back
selected vehicles at a residual value that is fixed at
inception of the contract in order to realize market
opportunities. Leases are evaluated at regular inter-
vals. The necessary precautions are made for any
potential risks.
Management of the residual value risk is
based on a defined feedback loop ensuring the full
assessment, monitoring, management and communi-
cation of risks. The process design ensures not only
professional management of residual risks but also
that the handling of residual value risks is systemati-
cally improved and enhanced.
As part of its risk management, the Volks-
wagen group uses residual value forecasts to regu-
larly assess the appropriateness of the provisions for
risks and the potential for residual value risk. The
contractually agreed residual values are compared
with the fair values obtainable. These are produced
from data from external providers and internal market-
110 Group management report