BMW 2009 Annual Report Download - page 67

65 Group Management Report
We manage currency risks both at a strategic and at an
operating level. At a strategic level (medium and long term),
foreign exchange risks are managed by natural hedging,
in
other words by increasing the volume of purchases
denominated in foreign currency or increasing the volume
of local production. For operating purposes (short and
medium term), currency risks are hedged on the financial
markets. Hedging transactions are entered into only with
financial partners with a good credit standing. The ongoing
financial crisis has, however, resulted in a deterioration in
the creditworthiness of many financial institutions and set
in motion a process of consolidation within the banking
sector. We take account of these circumstances by adjust-
ing counterparty limits as appropriate and by applying strict
counterparty risk management procedures. The nature
and scope of such measures are set out in Group guide-
lines.
We also reduce currency risk by refinancing credit and lease
business as a general rule in the currency of the relevant
market.
Interest-rate risks are managed by employing derivative
finan cial instruments. Interest-rate risks are measured and
limited both at country and Group level on the basis of a
value-at-risk approach. The risk-return ratio is also meas-
ured regularly using simulated computations in conjunction
with a present-value-based interest rate management
system. Sensitivity analyses, which contain stress scenarios
and show the potential impact of interest-rate changes
on earnings, are also used as tools to manage interest-rate
risks.
The deposit business operated by the Financial Services
segment, credit lines with various banks and the use of
other financing instruments ensure that sufficient liquid
funds are available to the Group. The finely tuned use of
a
wide range of capital market instruments has proven its
worth, particularly in the midst of the difficult business
environment caused by the banking and financial crisis.
Liquidity risk is continuously monitored at a separate entity
level. A cash flow requirements and sourcing forecast
system is also implemented throughout the Group to docu-
ment and manage liquidity risk.
Most of the Financial Services segment’s credit and lease
business is refinanced on the capital markets. Compared to
previous years, when the BMW Group was able to benefit
from first-class short-term ratings issued by Moody’s and
Standard & Poor’s (S & P), we were not fully able to extri-
cate ourselves from the difficulties facing the automotive
sector in the wake of the financial and economic crisis. On
5 November 2008, S & P issued a long-term rating of A
with stable outlook (previously A+ with stable outlook) and
changed the outlook from stable to negative on 27 Febru-
ary 2009. In the face of unfavourable macro-economic con-
ditions and persisting doubts about whether the principal
sales markets would recover quickly, BMW AG’s long-term
rating was downgraded on 13 November 2009 to A–
with
negative outlook. In conjunction with this downgrade,
S & P also changed its short-term rating to A-2. After
putting BMW AG’s rating to “under review for possible
downgrade” on 18 February 2009, Moody’s changed its
long-term rating on 3 April 2009 to A3 with negative out-
look (previously A2 with stable outlook) and downgraded
BMW AG’s short-term rating from P-1 to P-2.
With ratings of A– (S & P) and A3 (Moody’s), the agencies
continued to confirm BMW AG’s solid creditworthiness
for
financial liabilities with a term of more than one year. If
challenges remain persistent or if the economy takes
another downturn, there is a risk that ratings for the whole
of the automotive sector deteriorate again.
Irrespective of the above developments, securities issued
by BMW Group entities continue to enjoy a level of credit-
worthiness that is comparatively high for the automotive
sector. Access to the capital markets remains good, with a
diversified range of refinancing opportunities available to
us. After deteriorating during the second half of 2008 in
response to the financial crisis, refinancing conditions
eased in terms of credit spreads in 2009, enabling us to
raise debt capital at better conditions.
Changes on the international raw materials markets also
have an impact on the business development of the BMW
Group. In order to safeguard the supply of production
materials and to minimise the cost risk, all relevant com-
modities
markets are closely monitored. The economic
crisis and the related slump in demand on raw materials
markets enabled us to benefit from more favourable raw
materials price levels in 2009. We used the situation on
the market to hedge the price of precious metals (such as
platinum, palladium and rhodium) and of non-ferrous
metals for the current and future years using derivative in-
struments. Changes in the price of crude oil, which is an
important basic material in the manufacture of
compo-
nents, have an indirect impact on our production costs.