2007 Annual Report - Sappi

Notes to the group annual financial statements continued
for the year ended September 2007
17. Trade and other receivables continued
17.5 Off balance sheet structures
Letters of credit discounting
To improve the group working capital, the group discounts certain Letters of Credit with ABN AMRO Hong Kong at every
financial quarter end on a non-recourse basis. This programme allows the group to obtain financing and receive payment
upon shipment of goods, based on trade transaction documents. The bank will purchase a sight bill of exchange (or sight
Letter of Credit) or a usance bill of exchange (or usance Letter of Credit) at a discount in line with current market rates.
“Scheck-Wechsel”
The Scheck-Wechsel is a financial guarantee supplied to the bank of certain trade debtors who wish to obtain a loan to
finance early payment of trade receivables thereby benefiting from an early settlement discount. By signing the
Scheck-Wechsel, Sappi provides a financial guarantee to the bank of the customer. This financial guarantee contract falls
under the scope of IAS39 Financial Intruments.
This financial guarantee contract is initially recognised at fair value. At inception the risk for Sappi having to reimburse the bank
is nil because there is no evidence that the customer will not reimburse its loan to the bank. There is also no guarantee fee
due by the bank and the Scheck-Wechsel is a short term instrument (maximum 90 days). Therefore the fair value is zero at
inception. Subsequently the financial guarantee contract is measured at the higher of:
(i) the amount determined in accordance with IAS37 ‘Provisions, Contingent Liabilities and Contingent Assets and
(ii) the amount initially recognised less any cumulative amortisation.As no event of default has occurred no provision is set up
and the fair value at year-end remains at zero. However according to IAS37 a contingent liability of US$20 million has been
disclosed in this respect.
Trade Receivables Securitisation
To improve our cash flows in a cost-effective manner, we sell between 86% and 99% of our eligible trade receivables on a
non-recourse basis to special purpose entities (“SPEs”) that are owned and controlled by third party financial institutions.
These SPEs are funded in the commercial paper market and are not limited to transactions with us but securitise assets on
behalf of their sponsors for a diverse range of unrelated parties. We have a servicing agreement with the entities acquiring
our receivables, acting as agent for the collection of cash and administration of the trade receivables sold.
Sappi sells the majority of its ZAR receivables to a SPE managed by Rand Merchant Bank that issues commercial paper to
finance the purchase of the receivables. Sappi retains a small proportion of the credit risk attached to each underlying
receivable. Sappi is responsible for the collection of all amounts that are due from the customer. The purchase price of these
receivables is adjusted dependent on the timing of the payment received from the client. The rate of discounting that is
charged on the receivables is JIBAR (Johannesburg Inter Bank Asking Rate) plus 93 basis points spread. This structure is
currently treated as an off balance sheet arrangement. We have no obligation to repurchase any receivables which may
default and do not guarantee the recoverability of any amounts over and above the first tier loss provisions. The total amount
of trade receivables sold at the end of September 2007 amounted to US$144 million (September 2006: US$107 million).
Details of the securitisation programme at the end of fiscal 2007 and 2006 are disclosed in the tables that follow.
If this securitisation facility was to be terminated, we would discontinue further sales of trade receivables and would not incur
any losses in respect of receivables previously sold in excess of our first tier loss amounts. There are a number of events which
may trigger termination of the facility, amongst others, anunacceptable amount of defaults; terms and conditions of the
agreements not being met; or breaches of various credit insurance ratios (not applicable to all programmes). The impact on
liquidity varies according to the terms of the agreement; generally however, future trade receivables would be recorded on
balance sheet until a replacement agreement was entered into.
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