Liquidity risks
Please see the section entitled “Terms and conditions of the syndicated loan agreement” on page 73 et seq.
in regards to the material earnings and liquidity risks arising from the syndicated loan agreement.
The loan agreement contains a change of control pro-vision. Any change of control – i.e. a situation where an individual or a group of people acting in concert with each other (pursuant to an agreement or by other means) gain control over the Company – would give an exercisable right to terminate the loan for cause. The Company’s ability to manoeuvre would be eliminated if the loan were to be called immediately and would probably lead to its insolvency.
Based on the insights gained with respect to the liquidity situation from groupwide financial planning tools, we now utilise liquidity planning that covers a period of 13 weeks as well as a monthly update on the planning up to the end of the year. The introduction of refined controlling tools and IT systems support the planning process; in Germany, the introduction of SAP was completed as planned in January 2009.
According to the Company’s planning and based on the existing credit lines and guarantees, the liquidity of Conergy AG and the Group is basically ensured in both the short and medium term through cash inflows from operating activities. This is predicated on confirmation by an independent auditing firm that the existing syndicated loan can be refinanced beyond 31 December 2011.
Please see the section entitled “Terms and conditions of the syndicated loan agreement” on page 73 et seq.
in regards to details of the syndicated loan agreement.
If, in addition to that, there are substantial shortfalls in sales and earnings targets as well as in the expected cash inflows from operating activities, both the Com-pany’s and the Group’s existence as a going concern might be jeopardised if they are unable to offset the relevant effects through other actions.
Interest rate and currency risks
A large part of the Conergy Group’s purchasing and sales volume in the 2009 financial year was effected in various currencies – in particular, euros and the US dollar. The Company is thus exposed to substantial currency risks.
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A currency management process was put in place in the 2009 financial year because exchange rate fluctu-ations can materially affect the net earnings of the Conergy Group. It serves to systematically record as well as regularly analyse, measure and control the Group’s currency risks. Appropriate strategies are de-signed and executed based on the Group’s exposure to currency risks and its expectations. The Manage-ment Board has established clear guidelines for continuous monitoring of currency risks, compliance with which is regularly verified by a committee. These currency hedging transactions ensure that Conergy is no longer exposed to the exchange rate fluctuations it had to contend with in the past. The corresponding short-term and long-term interest rate positions have also been centrally recorded, analysed and measured since the start of the second half of 2009. The commit-tee monitors the fixed hedging strategies.
Usually, the Corporate Treasury department hedges both interest rate and currency risks in close collabo-ration with the operating units using hedges that in-volve derivative financial instruments, such as currency options, as set out in the Company’s “Treas-ury Guideline”. Treas“Treas-ury also hedges currency and in-terest rate risks related to the project business, as necessary. Furthermore, the Conergy Group optimises its currency risks by pushing natural hedging meas-ures – i. e. by matching cash outflows under delivery contracts with cash inflows from external sales in the same currency. Interest rate swaps and options are the primary means of hedging interest rate risks.
Sales of Conergy’s products and services are contin-gent on the willingness of its current and potential customers to make investments. This willingness to in-vest in turn hinges on the growth of demand for photo-voltaic units. Grid-connected PV units are often financed through extensive borrowings. This applies to both small and medium-sized units that are in-stalled by individuals, SMEs or government authorities as well as to major PV plants that are acquired by in-vestors. Low interest rates in recent years and hence low borrowing costs have had a positive effect on the profitability of photovoltaic units, stimulating the de-mand for solar power systems that is already being fed by statutory subsidies. Given otherwise unchanged general conditions, any increase in interest rates would raise borrowing costs and thus reduce the prof-itability of photovoltaic units, undermining demand for them. Restrictions on the availability of credit
particu-larly in consequence of the current crisis on the finan-cial and sales markets and higher expectations of investors as regards their return on investment could also depress the number of PV units that are installed.
But the Company’s project business is also closely linked to developments in the capital markets and thus depends on current interest rates. Rising interest rates or the banks’ growing unwillingness to provide loans would make project financing more expensive or even cause it to fail because Conergy’s customers tend to finance through borrowing, in particular for major PV plants; the resulting effects on demand for projects or its attainable margins would be highly detrimental. It is for this reason that Conergy is increasingly looking for alternative means of funding.
Default risks
Default risks from trade or financial receivables entail the risk that the receivables are paid late, not in full or not at all.
Customers wanting to do business with the Conergy Group are subject to various credit checks. In addition, the Company’s central working capital management continuously monitors all receivables outstanding worldwide in terms of their aging structure. Measures aimed at collecting receivables are determined in co-operation with the decentralised units. Business with major customers is subject to separate credit monitor-ing in connection with the Group’s central workmonitor-ing capital management as part of receivables manage-ment.
There is no guarantee nonetheless – especially against the backdrop of the current situation on the capital and sales markets as well as the process of consolida-tion among suppliers – that the Company will actually be able to collect receivables. It is also becoming in-creasingly difficult to obtain receivables coverage from credit insurers.
Risks related to the utilisation of government subsidies
Conergy Group companies have received public sub-sidies in the past. These subsub-sidies are subject to spe-cific requirements and strict controls aimed at verifying whether or not the standards for public subsidies have been met. Any noncompliance with the requirements
Management Board and Supervisory Board
carries the risk that the subsidies might have to be re-paid. We can not preclude that the modified plans or political changes in connection with Conergy’s factory in Frankfurt (Oder) or parts of this factory or other Group companies will entail a greater cut than expected in the subsidies made available to Conergy and that the Company might face repayment demands by the authorities, especially on grounds that it did not comply with the requirements.
Conergy plans to continue applying for government subsidies in future. Whether or not subsidies are granted is usually at the discretion of the public sector entity or authority making the grant subject to the availability of budgeted funds. Grants are frequent, provided the relevant budget has earmarked funds for a specific programme and provided all requirements are met.
But there are no options for obtaining and claiming subsidies by recourse to the courts.
Tax risks
Conergy and its domestic subsidiaries are subject to routine government tax audits. The Group’s foreign businesses are also subject to similar tax audits. The most recently completed tax audit of the companies in Germany concerned corporate income, municipal trade and value-added taxes in the 2000 to 2003 as-sessment periods. Tax asas-sessments for the following years are subject to subsequent audits and thus can be changed, particularly in the wake of a comprehensive tax audit.
The tax authorities have decided to eliminate a total of about EUR 7.8 million in loss carryforwards for Conergy AG, EPURON GmbH and SunTechnics GmbH (today:
Conergy Deutschland GmbH) as a result of the com-prehensive tax audit of the 2000 to 2003 assessment periods. The companies have already received revised tax assessments, which they have appealed. Conergy has not yet recognised any provisions for the taxes it expects to owe as a result of the comprehensive tax audit because both internal and external experts be-lieve that the appeals are highly likely to be successful and corresponding loss carryforwards exist.
Conergy and the tax authorities are disputing additional albeit monetarily less significant issues in connection with the comprehensive tax audit, namely the treat-ment of the costs related to the IPO, which was initially planned for 2001, as well as issues in connection with a wage tax audit.
A comprehensive tax audit of both Conergy AG and the Conergy Group’s German subsidiaries started in November 2009; it concerns the years 2004 through 2008. The underlying tax assessments are subject to subsequent audits and thus can be changed. The main findings of the comprehensive tax audit of the years 2004 through 2008 have not yet been made available.
Given the complexity of tax laws – e. g. with respect to intragroup pricing or VAT – current or future compre-hensive tax audits can always trigger demands for additional payments, both at home and abroad.
As at 31 December 2009, the Company has deferred tax assets of EUR 45.6 million primarily from tax loss carryforwards. Conergy assumes that these tax loss carryforwards will be available for offsetting against future income before they expire. These deferred tax assets will have to be written down if the underlying loss carryforwards can not be used in the foreseeable future. The changed shareholder structure following the completion of the December 2008 capital increase as well as the takeover of Dresdner Bank AG (in January 2009) and the merger of Dresdner Bank AG with Commerzbank AG (in May 2009) eliminated addi-tional tax loss carryforwards on a pro rata basis under Section 8c para. 1 German Corporate Income Tax Act.
Conergy continues to review with the assistance of in-ternal and exin-ternal experts whether the restructuring provision in Section 8c para. 1a German Corporate Income Tax Act – which was introduced as part of the so-called Bürgerentlastungsgesetz-Krankenversicherung for the purpose of enhancing the deductibility of health insurance premiums on 16 July 2009 – affects the December 2008 capital increase and also applies to the indirect changes in the shareholder structure in 2009 and the extent to which the remaining existing losses can be carried forward.
Furthermore, the European Commission has opened a formal investigation (C 7/10) regarding the admissibility of the restructuring provision of Section 8c para. 1 German Corporate Income Tax Act (KStG). According to the announcement of the Federal Ministry of Finance dated 30 April 2010, the provision may no longer be applied until the European commission has adopted a conclusive resolution. If the European commission ultimately decides that the restructuring provision is not applicable, we will no longer be able to utilise the Company’s or our domestic subsidiaries’ tax loss carry-forwards. If the tax loss carryforwards can no longer be utilised, this would have a substantially negative impact on Conergy’s assets, liabilities, cash flows and profit
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or loss. This fact was already taken into account in the determination of the deferred tax assets on loss carry-forwards such that it will not affect the extent of the deferred tax assets recognised in 2009.
Supplemental tax claims for past periods or the elimi-nation of the loss carryforwards could considerably increase Conergy’s future tax burden. In addition, changes in the tax law, such as the interest deduction ceiling introduced in 2008, which severely limits the tax deductibility of interest payments, could also raise the Company’s taxes.
Conergy works closely with internal and external experts in order to arrive at reliable and predictable assessments of its tax risks and reduce possible tax burdens by taking appropriate action and decisions.
Management risks
Conergy operates in the world’s most important solar markets. The Company generally pursues its business through subsidiaries whose managing directors are given extensive decision-making authority in order to be able to act and react autonomously in proximity to the relevant market.
These executives are committed to responsible man-agement. Nevertheless, given the responsibility and lat-itude that is granted to these executives, the risk of abuse can not be fully precluded despite fully developed and multi-stage review and controlling mechanisms.
Directors & Officers insurance policies (D&O insur-ance) that provide for suitable deductibles as defined in the German Corporate Governance Code have been purchased on behalf of all Group companies’ Manage-ment and Supervisory Board members as well as ex-ecutives for the purpose of hedging the risk of liability claims against the Group’s management.