2012 Integrated report - Sappi

29.2 Financial instruments continued
Hedge accounting
1. Fair value hedges
In June 2009, a partial-term fair value hedging instrument that hedged the unsecured notes due 2012 and unsecured notes due 2032
was sold. The gain on the hedging instrument was capitalised to the bonds and, in accordance with IAS 39 Financial Instruments:
Recognition and Measurement, was amortised over the shorter of the expected life of the bonds or the hedging instrument. The
unsecured notes due 2012 were redeemed in fiscal 2011 which resulted in the related unamortised gain related to those notes being
released to profit or loss. In fiscal 2012, the remaining unamortised gain of US$3 million was released to profit or loss as the original term
of the hedging instrument had expired.
In April 2011, Sappi Papier Holding issued US$350 million senior secured notes due 2021. The fixed rates of the bonds were swapped
into six-month US Dollar LIBOR rates set in advance. The hedge qualifies for fair value hedge accounting as all the material terms of the
swaps match the terms of the underlying bond.
The bonds and the swaps are revalued on a monthly basis and show movements in line with changing market conditions. All market
movements are reversed over time and the fair value of the bonds will at maturity revert to the nominal amount of the bonds. As the
swaps were contracted at the same time as the issuance of the bonds, the designated benchmark value of the bonds corresponds to the
nominal amount. The only income statement impact will be any residual ineffectiveness, which is not expected to be material. The initial
mark-to-market value of the swaps of US$2.1 million reflects the pricing of the swap and the difference between the mid-market curve
that was used to mark-to-market, and the effective market curve at which the swaps were contracted.
Sappi uses the REVALHedgeRx module (‘REVAL’), a web-based application that provides treasury and risk management solutions.
The application is supplied by Reval.Com, Inc., a financial technology company based in New York and is used to assess both the
prospective and the retrospective effectiveness of a fair value hedge relationship.
The statistical method chosen to measure prospective and retrospective effectiveness is the linear regression analysis.
REVAL uses past data to demonstrate that a hedge relationship is expected to be highly effective in a prospective hedge
effectiveness test.
The number of data points used to measure the effectiveness and the frequency of the data must be consistent over the life of the hedge
for both prospective and retrospective testing and must be appropriate given the particularities of the hedge. It is therefore considered
appropriate to use 60 monthly rolling data points. The monthly data points correspond to the historical Sappi month-end dates.
In order to create a complete set of data for the regression analysis, both the hedging instrument and the hedged item are back-dated at
inception date by creating a proxy trade. Actual historical three-month US Dollar LIBOR curves are used to generate net present values of
the proxy trades. As time passes, REVAL will update the regression by adding new actual observations and excluding the same number of
the oldest simulated observations from the data set.
The prospective test is considered to be identical to the retrospective test, which implies that for the prospective test, the same past data
(ie actual historical curves and remaining cash flows at each Sappi month-end date of the retrospective test) is used as for the
retrospective test.
The above swap was highly effective in a retrospective hedge effectiveness test.
Changes in fair value will represent period-to-period changes in ‘clean’ fair value (accruals of interest excluded).
The following is an analysis of the impact on pre-tax profit or loss for the period based on the consolidated accounts translated
at average rates:
US$ million
At average
rate
favourable
(unfavourable)
2012 2011
At average
rate
favourable
(unfavourable)
Fair value hedges
Realised result on termination of interest rate swaps – 1
Amortisation of de-designated hedges 3 18
Residual ineffectiveness – (3)
– gain on hedging instruments 3 19
– loss on hedged item (3) (22)
Total 3 16
sappi Integrated Report 2012 161