Principles and aims of financial management

Principles

Besides cash and liquidity management, the Group’s financial management activities include: managing interest rate, currency and commodity price risks; overseeing the Group’s financing; issuing guarantees and letters of support; and liaising with the rating agencies. Since the requirements and processes of Deutsche Postbank Group differ fundamentally from those of the remainder of the Group, the remarks below refer exclusively to the analysis with Postbank presented on an equity-accounted basis; in other words, cash flows are shown without the Deutsche Postbank Group.

First and foremost, we seek to control risk and to manage processes centrally. Responsibility rests with Corporate Finance, which is supported by three Regional Treasury Centres in Bonn (Germany), Fort Lauderdale (USA) and Singapore. These centres act as interfaces between headquarters and the operating companies, advise the companies on all financial management issues, and ensure compliance with the Group-wide guidelines. These guidelines and processes comply with the Gesetz zur Kontrolle und Transparenz im Unternehmensbereich (KonTraG – German law on control and transparency in business) of 27 April 1998.

Aims

Our principal goal is to minimise the cost of capital and financial risks, whilst safeguarding the Group’s lasting financial stability and flexibility. In order to maintain its unrestricted access to the capital markets, the Group continues to seek a credit rating that is higher than the average for the transport and logistics industry. In view of this aim, we monitor the development of our operating cash flow against adjusted debt particularly closely. Adjusted debt is the Group’s net debt, allowing for pension obligations that are not directly capital-backed and liabilities under operating leases.

Cash and liquidity management

Cash and liquidity management is a central activity overseen by the Corporate Treasury on behalf of the subsidiaries, whose operations span the globe. More than 80% of the Group’s external revenue is consolidated in cash pools and used to balance internal liquidity needs. In countries where this practice is ruled out for legal reasons, internal and external borrowing and investment are arranged centrally by the Corporate Treasury. In this context, we observe a balanced banking policy in order to avoid depending excessively on individual banks. Our subsidiaries’ internal revenue is also pooled and managed by the in-house bank with a view to escaping external bank charges and margins (inter-company clearing). Payment transactions take place according to uniform guidelines as well as by way of standardised processes and IT systems.

The Group’s unsecured firm credit lines total around €4.2 billion, of which some €398 million had been used as at 31 December. Our banking policy seeks to spread the volume of transactions widely and to foster long-term business relationships with financial institutions. Alongside the customary equal treatment clauses and termination rights, the relevant loan agreements do not contain any further undertakings concerning the Group’s financial indicators. Bridge-over financing for acquisitions temporarily gave rise to relatively substantial drawdowns on credit facilities in recent years. Average drawings on credit lines came to only around 4.4% in 2007 (previous year: 9.7%).

Managing market risk

The Group manages financial market risks by making use of both primary and derivative financial instruments. Interest rate risks are managed by way of interest rate swaps. Forward transactions, cross-currency swaps and options are used to hedge currency risks. Commodity price risks are largely passed on to customers via surcharges. The parameters, responsibilities and controls governing the use of derivatives are established in internal guidelines.

Group financing

We apply the principle of covering the Group’s financial requirements with a balanced ratio of equity to liabilities. The Group needs funds to repay outstanding debt, for capital expenditure and to finance its business activities. Our most important source of funds is the net cash from operating and investing activities. We cover our borrowing requirements with a flexible approach, using firm bilateral credit lines, capital market offerings, structured financing transactions and, as an off-balance sheet funding vehicle, operating leases. Our aim is to appeal to a broad circle of investors and to raise funds close to the time when the requirement arises. Borrowing largely takes place centrally and in euros, and the funds are distributed internally. Operating leases are used mainly to finance real estate and aircraft but also IT equipment as well as fleet and warehouse vehicles.

The most important currency in which Group debt is denominated is the euro. By way of derivative financial instruments, however, a portion of the euro debt is translated into foreign currencies in order to cover our operating companies’ liquidity requirements. Paying due regard to such transactions shows that the portion of the Group’s net debt denominated in euros was 60% (previous year: 40%); the US dollar share was 28% (previous year: 27%). The euro share mainly increased as a result of streamlining the foreign-currency debt portfolio.

Guarantees and letters of support

Deutsche Post AG provides collateral as necessary by issuing letters of support or guarantees for the loan agreements, leases and supplier contracts concluded by Group companies. This practice allows better conditions to be negotiated locally. Such collateral is provided and monitored centrally.

Creditworthiness of the Group

Credit ratings represent an independent and current assessment of a company’s credit standing. The ratings are based on a quantitative analysis of the subjects’ balance sheets, income statements and cash flow statements. Qualitative factors, such as industry particularities and corporate strategy, are also taken into account. Our creditworthiness is regularly reviewed by the international rating agencies Standard & Poor’s, Moody’s Investors Service (Moody’s) and Fitch Ratings. With our current category A rating, awarded to companies whose ability to meet their financial obligations is considered good, we rank above the average for the transport and logistics industry.