1. At present, the interest rates in the eurozone are at historically low levels. BASF recently took advantage of these favourable market conditions and issued a seven-year fixed-rate euro benchmark bond that was placed in May. We have another fixed-rate long-term bond outstanding that will mature in 2010.
Consequently, BASF has already locked in interest rates for the bulk of its financial debt and is hence relatively independent from a potential sudden rise in interest rates.
Basically, however, we do not believe that the chemical sector will suffer particularly from a rise in interest rates, given the current extremely low interest rate level. Additionally, there is no indication of an extreme rise in interest rates in most economies. However, the chemical sector includes companies with relatively weak credit ratings, for which any additional interest burden might be difficult to digest.
2. We welcome the requirement for exchange-listed companies in the EU to apply International Financial Reporting Standards (IFRS). IFRS will make financial statements of European companies and companies from other countries that also use IFRS more comparable, and will help investors to understand the performance of companies better. Furthermore, we welcome the attempts by the International Accounting Standards Board (IASB) and the US standard-setting Financial Accounting Standards Board (FASB) to converge their standards. In the long run, this will reduce costs significantly for companies that are listed on US stock exchanges.
Because BASF’s shares are listed on the New York Stock Exchange (NYSE), the firm is subject to US capital market legislation, including the Sarbanes-Oxley Act (SOX) 2002. SOX contains a number of new corporate governance regulations. We are establishing a system to document the information and control systems for financial reporting in the BASF Group that will be subject to attestation by our auditors in accordance with Section 404. In general, the new US regulations considerably increase documentation and review requirements, as well as the associated expenses.
As we are still in the middle of implementing the system, it is too early to make a judgment about whether Section 404 also improves efficiency and productivity throughout BASF. This would definitely compensate, at least partly, for the burdens that we have in complying with this new rule.
3. Changing demographics, volatile capital markets and new legal frameworks, such as reporting standards and tax rules, have made companies more sensitive to managing pension-related risks. In the past couple of years, the risks inherent to externally funded pension plans have also become apparent.
Given the current market conditions and the legal framework, a sufficiently funded pension obligation should serve as a cushion in volatile markets. The legal conditions for establishing defined contribution plans should be improved. Also the rate of change has made management of corporate pension schemes more difficult and costly. Companies and employees require a stable legal environment in acknowledgement that pensions are a long-term affair.
