Merck uses derivative financial instruments to minimize currency risks and financing costs caused by exchange rate or interest rate fluctuations. Financing transactions in foreign currencies are generally hedged. In certain cases, the company also hedges anticipated sales and future costs for a period of up to three years. (More details are available starting in Note [39] “Management of financial risks”).
Material financial transactions involving credit risk are only entered into with banks that have a good credit rating and a minimum rating of A- from Standard & Poor’s. The rating of the commercial banks is constantly observed in order to quickly respond to deterioration. From 2007, we have access to a € 2 billion syndicated multicurrency credit facility with 19 banks, which have good credit ratings. Our long-term liquidity is ensured by our positive operating cash flow, the centralized liquidity management within the Group and an available credit facility with a remaining term of six years. We do not see any threat to Merck of a credit bottleneck, even in connection with the current financial crisis. Due to its broad customer base, Merck is likewise only exposed to a low credit risk in its sales markets.
The carrying values of individual items in the balance sheet are exposed to the risk of changing market and business circumstances and thus also to changes in fair values. This can adversely impact profit and affect balance sheet ratios. This applies in particular to the adjustment of book values of acquired companies to the respective fair values. In particular, the share of goodwill and other intangible assets in the consolidated financial statements increased significantly as a result of the Serono acquisition in 2007. (More details are available starting in Note [23] “Intangible assets”).
Merck has obligations in connection with pension commitments. The bulk of these obligations is covered by the provisions disclosed in the balance sheet, while the smaller remainder is externally funded. The obligations are regularly evaluated by preparing annual actuarial valuations. Changes in the valuation parameters, for example in the interest rate, salary increase rate or death probabilities, can negatively influence the value of pension obligations and necessitate additional expenditure for pension plans. As far as pension obligations are covered by plan assets consisting of interest-bearing securities, shares, real estate and other financial assets, decreasing or negative returns on these assets can adversely impact the value of the plan assets and thus result in further additions.