The ‘Risks of Industry and Competition’ are at about the previous year’s level. The leading technological position of our solutions alleviates a possible price risk resulting from weak demand. At the moment, there no longer seems to be a risk that Japanese competitors could have a competitive advantage due to a weak yen. Following the considerable advantages they had for many years due to the exchange rate structures, these structures again shifted substantially in favor of European suppliers. German suppliers will have new opportunities once print shops’ propensity to invest recovers. A renewed unfavorable change in exchange rates would weaken our market position – as well as that of our European competitors. Our measures to strengthen purchasing and production outside the euro zone lessens the risks arising from this development in the medium term.
Whereas, at least in the sheetfed offset area, the market structure among equipment suppliers to the print media industry has been robust for a number of years, the competitive structure could change if the crisis is prolonged. If competitors fall by the wayside or merge, this could result in not only risks, but in opportunities for us as well, because we could then expand our market position. Moreover, we also see an opportunity that our principal competitors in the finishing area will cease their extremely aggressive market defense strategy due to the crisis.
We are improving our opportunities of acquiring increased market share following the economic crisis by:
We introduced our new product portfolio and presented our significant new developments to customers at drupa 2008. Since these new products proved themselves in day-to-day operation following their market launch, the risks in the area of products has fallen.
In order to avoid undesirable developments, our priority in all R&D projects is by necessity on the customer’s benefit. We work closely together with concept customers in all phases of product development. A panel of experts from the areas R&D, product management, controlling, manufacturing, and service determine in advance the direction of further product development. Among other things, the panel members make decisions based on market analyses as well as economic viability considerations from the Group’s point of view and based on our technology roadmap, which we utilize to describe the long-term development goals that we need to attain in order to satisfy future customer requirements. We secure the results of our research and development activity with the Group’s own proprietary rights.
‘Financial Environment Risks’ have increased over the previous year. Contributing to this development was the fact that so far, Heidelberg has only received credit approval from the banks in principle. We discuss the background of this development in the next five paragraphs:
Potential refinancing risks could arise should a company no longer be in a position to obtain the financial means necessary to pay its financial liabilities.
During the period 2004 to 2006, the € 280 million convertible bond, the € 550 million syndicated credit facility, and three borrower’s note loans totaling approximately € 150 million were all successfully placed. Heidelberg additionally has access to various bilateral credit lines from banks. The syndicated credit facility, which totals € 550 million, is largely for the purpose of financing seasonally higher financing requirements. By contrast, longterm financing requirements are covered by the convertible bond, the three borrower’s note loans, and a € 500 million long-term sale (usufruct) and leaseback agreement that was implemented the previous year covering improved land. Our overall credit facilities, with the core elements convertible bond, borrower’s note loans, syndicated credit, and bilateral credit lines have so far ensured a stable financing structure with a well-balanced maturity profile. These facilities always adequately covered the debt that arose regularly as a result of fluctuations arising during the year compared with the outstanding amounts at the financial year-end.
With the current financial market crisis and its impact on the real economy, the basic financial conditions for all companies, and therefore for Heidelberg as well, have changed fundamentally. Due to the development of the price of the Heidelberg share, it must be assumed that from now on, investors holding the convertible bond will exercise their right to accelerated repayment of the bond in February 2010, as a consequence of which repayment will occur prior to February 2012. Because of the marked decline in Heidelberg’s sales, it must be assumed that the originally agreed upon financial covenants under the terms of the syndicated credit can no longer be met over the remaining term to maturity of the credit in July 2012. As a precaution, Heidelberg therefore obtained an agreement to an ‘amendment request’ (adjustment of the originally agreed upon financial covenant) in December 2008 from the relevant banks.
The situation is currently as follows for Heidelberg: Comprehensive discussions were held with the banks that are providing the financing based on a detailed financing concept that is largely in agreement with the previous financing structure in type, scope, and term. The banks providing the financing granted their fundamental credit approval late in May through early June 2009, however under the condition that in accordance with the second package of measures, i.e., the ‘Pact for Employment and Stability in Germany’ (the so-called Economic Stimulus Package II), and for the loan granted by KfW collateral be provided by the Federal Republic of Germany and the States of Baden-Wuerttemberg and Brandenburg by the end of August 2009. Although the corresponding administrative units of the German Federal Government gave their fundamental consent to this, written confirmation is currently still pending. We anticipate a final decision from the Economic Committee of the State of Baden-Wuerttemberg in the near future. Based on previous negotiations, the Management Board expects a positive decision here as well. If, however, completion of the complete, legally binding agreements should fail to occur, this would result in a risk endangering Heidelberg’s existence.