29. MANAGEMENT OF FINANCIAL RISKS
The financial management of the DOUGLAS HOLDING AG is responsible for the DOUGLAS Group's financing and supports decision-makers in the German and foreign Group companies in respect of all financial issues.
The uniform presence of the DOUGLAS Group facilitates better conditions on the financial markets, and the bundling of the financing volumes of all domestic Group companies allows optimal use of the resources available as part of a cash management system.
The financial risks relevant to the DOUGLAS Group, such as liquidity risks, the risk of price changes, default risks and risks from cash flow fluctuations, are adequately controlled and monitored by the financial management of the DOUGLAS HOLDING AG.
LIQUIDITY RISKS
The DOUGLAS Group's non-current financing is secured not only by its solid equity but also through the bank loans at its disposal. This is backed by the ongoing, stable cash flows of the operating Group companies.
In September 2007, DOUGLAS-HOLDING AG signed the loan agreement for a revolving credit facility in the amount of 500.0 million EUR, to which we refer in more detail under the section entitled “Financial liabilities”. This ensures sufficient provision of credit for a period of at least five years.
All of the German subsidiaries of the DOUGLAS Group are linked in to a cash management system (cash pooling). By combining financing volumes, short-term liquidity surpluses of individual Group companies can be used to finance the cash requirements of other Group companies. This leads to a reduction in borrowing and an optimizing of cash investments, thus having a positive impact on the Group's net interest income.
INTEREST RATE RISKS
The interest rate risk is the result of fluctuations in interest rates on the money and capital markets and market-related fluctuations of exchange rates.
In order to minimize the Group’s risks associated with interest rate fluctuations when refinancing, long-term loans were taken out at fixed interest rates and loans with variable interest rates were hedged by concluding interest rate swaps.
The following interest rate swaps were in use on the balance sheet date to reduce risk:
The payments resulting from the swaps are at the respective interest adjustment dates so that the swaps’ impact on liquidity is spread over their maturities.
As a result of the cyclical nature of the business of the DOUGLAS Group’s operating subsidiaries, its investment portfolio comprises current, non-speculative investments with transparent interest risks. As of balance sheet date, 104.1 million EUR were invested on a short-term basis and interest rates between 4.0 percent and 4.69 percent.
CURRENCY RISKS
Currency risks within the DOUGLAS Group are minimal since around 92 percent of the Group’s sales were effected in euros in fiscal year 2006/07, and merchandise was purchased almost exclusively in euros. In order to hedge the residual currency risks, DOUGLAS HOLDING AG’s financial management regularly reviews the DOUGLAS Group’s currency items and analyses the pros and cons of implementing derivative financial instruments.
DEFAULT RISKS
A default risk could exist if a banking partner should default, in particular if it becomes unable to pay out on monetary deposits or for positive market values for derivatives. The DOUGLAS Group counters this risk by exclusively investing and taking out financial instruments with first-class banks. The volume is also being distributed amongst several contracting parties in order to avoid concentration risks.
RISKS FROM CASH FLOW FLUCTUATIONS
Changes in future interest rates can lead to cash flow fluctuations for receivables and liabilities with variable interest rates. As the bulk of the DOUGLAS Group’s outstanding bank loans are either fixed-rate loans or variable-rate loans that are hedged using interest rate swaps, the DOUGLAS Group is not exposed to any notable risks from cash flow fluctuations.
FINANCIAL LIABILITIES
Effective as of September 24, 2007, DOUGLAS-HOLDING AG has taken up a revolving credit facility in the amount of 500.0 million EUR from an international banking syndicate. The term of this revolving credit facility is five years with the option of extending it twice for a further period of one year (“5+1+1”). Draw-downs are charged at EURIBOR + 25 basis points, whereby the margin is fixed for the term. The commitment commission for the unutilized portion of the line is 30 percent of the margin. As of the balance sheet date, this line had not been utilized.
The Douglas Group’s current financing need has previously been covered by bilateral bank credit lines. As of the balance sheet date of September 30, 2007, the whole of the revolving credit facility of 500.0 million EUR was available, so that the bilateral credit lines that have not been utilized to date will gradually expire. Draw downs under the bilateral credit lines amounted to 83.6 million EUR (previous year: 106.8 million EUR) and under the revolving credit facility to 0.0 million EUR.
Liabilities to banks (without current accounts) as of September 30, 2007
| Currency | Original amount in million currency units |
Nominal amount in EUR mill. |
Carrying amounts in EUR mill. |
Fair values in EUR mill. |
||
|---|---|---|---|---|---|---|
| EUR | 325.1 | 325.1 | 255.2 | 251.8 | ||
| CHF | 42.2 | 25.4 | 20.4 | 20.7 |
Liabilities to banks (without current accounts) as of September 30, 2006
| Currency | Original amount in million currency units |
Nominal amount in EUR mill. |
Carrying amounts in EUR mill. |
Fair values in EUR mill. |
||
|---|---|---|---|---|---|---|
| EUR | 281.6 | 281.6 | 227.5 | 225.1 | ||
| CHF | 42.2 | 26.6 | 22.4 | 23.2 |
The terms of the bank loans are as follows:
The average interest rates of the liabilities to banks are:
Independence from individual banks is ensured in that any individual bank’s portion of the total volume of current, medium-term and non-current liabilities to banks does not exceed 20 percent. This keeps the risk of lender default for the DOUGLAS Group at a minimum.