2007 Annual Report - Sappi

31. Financial Instruments
The group’s financial instruments consist mainly of cash and cash equivalents, accounts receivable, certain investments,
accounts payable, borrowings and derivative instruments.
1. Risk management objectives and policies
The principal market risks (that is the risk of loss arising from adverse changes in market rates and prices) to which Sappi is
exposed through financial instruments are:
– interest rates on interest-bearing borrowings;
– foreign exchange rates, generating translation and transaction gains and losses; and
– credit risk.
A treasury committee consisting of senior management of the group meets regularly to review net currency, interest rate,
derivative instruments, group funding, credit insurance and monetary investment risks and exposures. Treasury management
strategies are also evaluated and revised where necessary. The treasury policy is formally documented and these policies
are the guidelines for the decisions that are made by the treasury committee.
Interest rate risk
Sappi has a policy of maintaining a balance between fixed rate and variable rate loans that enables it to minimise, on a cost
effective basis, the impact on reported earnings while maintaining a reasonably competitive, market-related cost of funding.
The specific balance is determined separately for the European, North American and Southern African businesses of Sappi
to reflect more accurately the different interest rate environments in which these businesses operate. We monitor market
conditions and may utilise interest rate derivatives to alter the existing balance between fixed and variable interest loans in
response to changes in the interest rate environment.
Currency risk
Sappi’s foreign exchange policy consists of the following principal elements:
– The majority of the borrowings in each country are made in the currency of that country;
– Translation risks are not hedged;
– All external borrowings raised in currencies other than the domestic operating currency of the borrowing entity are
immediately and continuously protected by forward exchange contracts;
– All consummated (i.e. invoiced) sales and purchases in foreign currencies are initially netted on a global basis, with the resulting
net exposure generally being covered by forward exchange contracts against subsequent fluctuations in exchange rates;
– Hedging against trading transactions not yet invoiced is limited. Deviations from these rules require specific board approval;
– Material capital expenditures for which forward exchange contracts are always taken out as and when the expenditure is
committed; and
– Anticipated exports and imports where the purchase of forward exchange contracts/currency options is restricted to a
limited portion of expected orders.
Credit risk
Credit risk exposures arise mainly from:
– investing in or dealing with financial counterparties which is the responsibility of group treasury; and
– trade debtor management which is the responsibility of the mills and the regional treasury management.
A significant portion of the group’s sales and accounts receivable are from major customers. Where appropriate, credit
insurance has been taken out over the group’s trade receivables.
None of the group’s other receivable financial instruments represent a concentration of credit risk because the group has
dealings with a variety of major banks and customers worldwide.
sappi limited | 07 | annual report 143