Financial Position

In the framework of the economic crisis, especially in Container Shipping, the Hapag-Lloyd Group – the majority stake in which has been sold – made use of financing commitments undertaken by TUI AG. TUI AG also made financial contributions to the restructuring measures which have meanwhile been initiated. As per the end of the financial year under review, TUI therefore retained its exposure in Container Shipping, with an equity stake of €910m and outside capital worth almost €1.7bn.

In September 2009, TUI Travel PLC issued convertible bonds worth £350m sterling. In this context, an additional bank loan was taken out worth £140m sterling. These two measures had a positive effect on TUI’s liquidity situation.

In the completed financial year, TUI AG cut its debt by a nominal amount of €636m.

The Group’s financial position

Principles and goals of financial management

Principles   
As a matter of principle, the TUI Group’s financial management is centrally operated by TUI AG, which acts as the Group’s internal bank. Financial management covers all Group companies in which TUI AG directly or indirectly holds an interest of more than 50%. It is based on policies covering all cash flow-oriented aspects of the Group’s business activities. A division of tasks between TUI AG and TUI Travel PLC, launched when TUI and First Choice merged their tourism business in 2007, continues to apply. TUI Travel PLC performs the financial management functions for the TUI Travel Group, while TUI AG retains this function for all other business activities of the Group.

Goals   
TUI’s financial management aims to ensure sufficient liquidity for TUI AG and its subsidiaries at all times and to limit financial risks from fluctuations in currencies, interest rates and commodity prices. All financial transactions serve the goal of supporting any measures designed to achieve an improvement in the current credit rating in the medium term.

Liquidity management   
The Group’s liquidity safeguards consist of two components:

• Through intra-Group cash pooling, the cash surpluses of individual Group companies are used to finance the cash requirements of other Group companies.
• TUI uses syndicated credit facilities and bilateral bank loans as well as its liquid funds to secure sufficient cash reserves. Planning of bank transactions is based on a monthly rolling liquidity planning system.

Limiting financial risks   
The Group companies operate on a worldwide scale. This gives rise to financial risks for the TUI Group, mainly arising from changes in exchange rates, interest rates and commodity prices. The business transactions of Group companies are primarily settled in euros, US dollars and British pounds sterling; other currencies of relevance are Swiss francs and Swedish kronor.

The Group has entered into hedges in more than 20 foreign currencies in order to limit its exposure to risks from changes in exchange rates for the hedged items. Risks related to changes in interest rates arise on liquidity procurement in the international money and capital markets. In order to minimise these risks, the Group uses derivative interest hedges on a case-by-case basis in the framework of its interest management system. Changes in commodity prices affect the TUI Group, in particular in procuring fuels such as aircraft fuel and bunker oil. Most price risks related to fuel procurement are hedged in Tourism, where price increases cannot be passed on to customers due to contractual agreements.

More detailed information on hedging strategies and risk management as well as financial transactions and the scope of such transactions at the balance sheet date is provided in the Risk Report in the management report and the section Financial instruments in the notes on the consolidated financial statements.

Capital structure of the Group

Capital structure   
The development of the TUI Group’s capital structure in the short financial year 2009 was mainly determined by the sale of Container Shipping as well as the purchase of a financial stake of 43.33% in Albert Ballin Joint Venture GmbH & Co. KG.

Overall, non-current capital decreased by 17% to €7,415m. It declined by 4 percentage points to 55% in relation to the balance sheet total. The equity ratio climbed to 18%, up from 16% in 2008. Equity and non-current financial liabilities accounted for 41% of the balance sheet total at the balance sheet date, as in previous year.

The gearing, i.e. the ratio of average net debt to average equity, rose to 95%, up from 80% in the previous year.

Equity   
Subscribed capital amounted to €643m as in previous year. In the year under review, €98m were withdrawn from the capital reserve, which only comprised transfers from premiums, in order to balance the net loss for the year. The capital reserve decreased to €871m. Revenue reserves increased by €1,059m to €247m. Equity included the hybrid bond of €295m issued in December 2005. Minority interests accounted for €324m of equity.

Provisions   
Provisions mainly comprised provisions for pension obligations, current and deferred income tax provisions and provisions for typical operating risks classified as current or non-current, depending on expected occurrence. At the balance sheet date, they accounted for a total of €2,220m and were thus €95m or 5% up year-on-year.

Financial liabilities   
The financial liabilities of the Continuing Operations decreased by a total of €1,440m to €3,715m. They consisted of bonds totalling €2,226m, liabilities to banks of €1,101m, liabilities from finance leases of €220m and other financial liabilities of €168m. Financial liabilities were reduced by the repayment of a bond worth €400m. In addition, the promissory notes worth €183m, originally maturing in December 2009, and a volume of €33m of the promissory notes originally maturing in April 2010 were already repaid in the completed financial year. TUI also acquired bonds worth €20m for the exchangeable bond issued by Nero Finance Ltd. with shares in TUI Travel PLC as underlying and thus reduced its own financial debt by the same amount, taking into account the associated overall contractual relationships. When the financial year was changed, the seasonal nature of the tourism business and the associated operative payment flows caused bank debt to decline at the level of the TUI Travel Group as at the end of the financial year. Other loans newly taken out and other loan redemptions only accounted for minor amounts. The allocation of non-current and current financial liabilities was based on the respective maturities. More detailed information, in particular on the remaining terms, is provided under Financial liabilities in the notes on the consolidated financial statements.

Other liabilities
At €5,047m, other liabilities decreased by €2,507m or 33% year-on-year. This decrease was largely determined by the deconsolidation of the Container Shipping.

Ratings by Standard & Poor’s and Moody’s

In the short financial year 2009, the rating agencies Standard & Poor’s and Moody’s adjusted their credit ratings of TUI AG due to the situation of Hapag-Lloyd and the implication on TUI’s invested capital in Container Shipping. The corporate rating assigned by Standard & Poor’s was adjusted to ‘B- (credit watch with negative implications)’, with Moody’s changing their rating to ‘Caa1 (negative outlook)’.

The senior notes of around €1.6bn issued in 2004 and 2005 and the convertible bond of around €0.7bn issued in 2007 were assigned a ‘CCC+’ rating by Standard & Poor’s and a ‘Caa2’ rating by Moody’s. The hybrid bond issued in December 2005 was partly treated as equity as it was subordinated to other liabilities and did not have a fixed maturity; it was therefore rated ‘CCC-’ by Standard & Poor’s and ‘Caa3’ by Moody’s.

Key financing measures

The capital structure in the short financial year 2009 was mainly character­ised by the reduction in debt.

Issue of a convertible bond   
At the end of September 2009, TUI Travel PLC issued convertible bonds worth £350m sterling with a five-year maturity. This capital market transaction was implemented in October 2009.

In this context, TUI AG has initiated measures to counter a potential dilution of the controlling majority in TUI Travel PLC in the event that all conversion options are exercised. In the completed financial year, 10 million shares in TUI Travel were acquired to this end. At the beginning of the 2009/10 financial year, a further 21.9 million shares were acquired to secure the required controlling majority.

Syndicated credit facility   
Furthermore, at the end of September, TUI Travel signed a syndicated credit facility of £140m sterling. The credit facility will mature at the end of June 2012.

Purchase of parts of an exchangeable bond
In January 2008, Nero Finance Ltd., a third-party company independent of TUI, issued exchangeable bonds worth €450m. TUI booked a corresponding against shares in TUI Travel PLC financial liability via related agreements on repurchase rights and obligations concerning the TUI Travel shares underlying the exchange­able bonds, concluded with Deutsche Bank. At the beginning of 2009, TUI re­­purchased exchangeable bonds worth €20m so that TUI’s financial liabilities were reduced accordingly.

Redemption of a bond   
The bonds worth €400m issued in 2004 and maturing in August 2009 were repaid from liquid funds.

Redemption of notes   
The notes worth €183m issued in 2006 and maturing in December 2009 were repaid early from liquid funds in order to benefit from market opportunities.

In 2006, TUI issued additional notes worth €217m and maturing in April 2010. In order to take advantage of market opportunities, TUI repurchased notes worth a nominal amount of €33m in the completed financial year, earlier than required, so that the remaining volume stands at €184m.

Interest rates and terms

Interest and financing environment
Due to the worldwide financial and economic crisis, interest rate levels declined significantly. This resulted in lower interest income from investing liquid funds. On the other hand, TUI benefited from lower interest rates in floating-rate debt titles. Lower charges were incurred, in particular, by the interest payable on the floating rate bonds of €400m and €550m, a floating rate note volume of initially €162m and the amounts drawn under TUI Travel’s syndicated credit line. TUI also repaid long-term financing instruments and thus considerably reduced the basis for interest payments.

As 2009 progressed, the environment for financing schemes in the money and capital markets deteriorated for the TUI Group due to the rating downgradings by Standard & Poor’s and Moody’s and in particular the effects of the global financial crisis. As a result, credit margins increased substantially across all sectors, in particular in the non-investment grade segment, and investors showed lending restraint. TUI was able to service its refinancing obligations through its liquid funds and by drawing on existing credit lines. New credits were only taken out to a minor extent. Interest rates and maturities of the Group’s debt are outlined in detail under Liabilities (Financial liabilities and liabilities to banks) in the notes on the consolidated financial statements.

Listed bonds                   

Off-balance sheet financing instruments

Operating leases   
In the short financial year 2009, off-balance sheet financing instruments (operating leases) were used in the Tourism Division in order to further optimise the financing structure. In connection with the ongoing renewal of the aircraft fleet in Tourism, a total of seven new aircraft were added in 2009. Operating leases were concluded for all aircraft, including six sale-and-lease-back transactions.

The development of the operating rental, leasing and charter contracts is presented in the section Net assets in the management report. More detailed explanations and information on the structure of the remaining terms of the associated financial liabilities are provided in the section Other financial liabilities in the notes on the consolidated financial statements. There were no contingent liabilities related to special-purpose companies.

Liquidity analysis

Liquidity reserve   
In the short financial year 2009, the TUI Group’s solvency was secured at all times by means of cash inflows from operating activities, the purchase price received for the sale of a stake in Hapag-Lloyd, liquid funds as well as bilateral and syndicated credit agreements with banks.

At the balance sheet date, the liquidity reserve of TUI AG as the Group’s parent company consisted of unused bilateral credit lines with banks as well as cash and cash equivalents. It totalled €0.5bn at the balance sheet date.

Restrictions on the transfer of liquid funds
At the balance sheet date, there were restrictions worth €0.1bn on the transfer of liquid funds within the Group that might have significantly impacted the Group’s liquidity such as restrictions on capital movements and restrictions due to credit agreements concluded.

Change of control   
Significant agreements taking effect in the event of a change of control of the Company following a takeover bid are outlined in the chapter Information Required under Takeover Law.

Summary cash flow statement

Net cash inflow from operating activities
In the completed short financial year, the cash inflow from operating activities totalled €1,135m. The decline on the comparative period in 2008 was above all attributable to the fact that Container Shipping was included for a 9-month period in 2008, whereas it was only included for a 3-month period until its disposal in the short financial year 2009. Further reasons for the decline were the capacity cuts in Tourism and the unfavourable economic environment.

Net cash outflow from investing activities
In the financial year under review, the total cash outflow from investing activities was €501m. While a cash inflow was generated from the sale of Container Shipping, a cash outflow resulted from the granting of loans to the acquirer of Hapag-Lloyd AG and the acquisition of the 43.33% stake in Albert Ballin Joint Venture GmbH & Co. KG. Further outflows of cash related to investments in property, plant and equipment and financial investments in the short financial year under review, above all a loan to Albert Ballin Terminal Holding GmbH, used to finance the acquisition of a 25.1% stake in HHLA Container Terminal GmbH, and a capital increase in TUI Cruises GmbH.

Net cash outflow from financing activities
The net cash outflow from financing activities accounted for €1,370m, primarily due to the repayment of €400m of the floating rate notes and the early redemption of other liabilities to banks by TUI AG. In the comparative period in 2008, a cash inflow of €450m was recorded due to the launch of a financing scheme with shares in TUI Travel PLC as underlying.

Development of cash and cash equivalents

The detailed cash flow statement and further explanations are comprised in the consolidated financial statements and the section Notes on the cash flow statement in the notes on the consolidated financial statements.

Analysis of investments

The development of fixed assets including property, plant and equipment and intangible assets as well as shareholdings and other investments is presented in the section Net assets in the management report. Additional explanatory information is provided in the notes on the consolidated financial statements.

Additions to fixed assets

Additions to property, plant and equipment by division

At €216m, investment in property, plant and equipment as well as investment property had a part of 21% of additions to fixed assets. In the additions to the companies measured at equity the 43.33% stake in the Container Shipping is included.

Investments in property, plant and equipment by divisions

Tourism   
The investment in property, plant and equipment in Tourism of €208m decreased by 42% year-on-year due to reduced investment in the Hotel Sector.

Investment obligations

Order commitments   
Due to agreement concluded in the 2009 short financial year or in previous years, order commitments for investments totalled €2,519m at the balance sheet date, €258m of which were related to scheduled deliveries in the 2009 financial year. More detailed information is provided in the section Other financial obligations in the notes on the consolidated financial statements.

Tourism   
In Tourism, order commitments amounted to €2,511m as of 30 September 2009. Early in October 2009, the cancellation of an order of 10 Boeing 787 aircraft out of a total order of 23 aircraft has agreed with Boeing. No deliveries have been planned for the financial year 2009/10.

Financial position of TUI AG

TUI AG is the TUI Group’s parent company and central financing entity. This also essentially characterises its financial position. The changes in equity outlined for the TUI Group, in particular changes in the reserves as well as bonds, were also reflected in TUI AG’s statement of financial position.

Abbreviated balance sheet of TUI AG (financial statement according to German Commercial Code)

Development of TUI AG’s capital structure

Equity   
At €2,018m, TUI AG’s equity declined slightly by 5%. The subscribed capital of TUI AG consists of no-par value shares, each representing an equal portion in the capital stock. The proportionate share in the capital stock per share is around €2.56. The subscribed capital of TUI AG remains around €643m and comprises 251,444,305 shares.

In the year under review, an amount of €98m was withdrawn from the capital reserves and used to balance the net loss for the year. Revenue reserves were retained unamended. Taking account of the profit carried forward and the withdrawal from the capital reserves, the net result available for distribution was balanced. The equity ratio rose to 27.9% (previous year: 24.1%).

The special item with an equity portion from tax value adjustments on fixed assets remained almost unchanged.

Provisions   
Provisions decreased by 49% to €590m. They consisted of provisions for pensions of €212m (previous year: €230m) and other provisions of €378m (previous year: €925m). The decline in Other provisions was mainly caused by the expiry or transfer of hedges for Tourism companies to TUI Travel PLC.

Liabilities   
TUI AG’s liabilities totalled €4,578m and thus declined by €890m or 16% year-on-year. The decrease was attributable to the scheduled repayment of a bond and the early redemption of bonds and note loans to take advantage of market opportunities.
 
New capital authorisation resolutions by the AGMs
Disclosures on new or existing capital authorisation resolutions by the AGMs are presented in the following chapter Information Required under Takeover Law.