2007 Annual Report - Sappi

31. Financial Instruments continued
The range of interest rates in respect of all non-current borrowings comprising both fixed and floating rate obligations, is
between 2.46% and 10.65% (depending on currency). At September 2007, 45% of Sappi’s non-current borrowings were
at fixed rates of interest, and 55% were at floating rates. Floating rates of interest are based on LIBOR (London Inter-bank
Offered Rate – for USD borrowings), on EURIBOR (European Inter-bank Offered Rate – for Euro denominated borrwings) and
on JIBAR (Johannesburg Inter-bank Agreed Rate – for SA borrowings). Fixed rates of interest are based on contract rates.
Sappi’s Southern African operations have in the past been particularly vulnerable to adverse changes in short-term domestic
interest rates, as a result of the volatility in interest rates in South Africa. During 2007 however domestic interest rates have
increased from 8.5% to 10.2% for the 3-month JIBAR.
In 2006, Sappi Manufacturing (Pty) Ltd converted ZAR1 billion worth of short term funding by raising a bond in the local market
under its medium term note programme (DMTN). The bonds are repayable in 2013 and bear interest at a fixed rate of 9.34%
payable semi-annually.
Sappi Forest Products issued a second tranche of ZAR1 billion (SMF2) under its DMTN programme on 25 September 2007.
The bond was issued at a fixed rate of 10.64% maturing 14 October 2011 and was 1½ times oversubscribed.
Interest rate derivatives
Sappi uses interest rate options, caps, swaps and interest rate and currency swaps as a means of managing interest rate
risk associated with outstanding debt entered into in the normal course of business. Sappi does not use these instruments
for speculative purposes. Interest rate derivative financial instruments are subject to hedge accounting, where applicable
and as appropriate under International Financial Reporting Standards.
There are four existing US$ interest rate swaps for the total amount of US$750 million converting fixed rates of 6.75% and
7.5% into variable rates and three US$ interest rate swap contracts for the total amount of US$106.6 million, converting
US$ fixed interest rates of 5.90%, 7.38% and 6.65% respectively, into 6-month US$ Libor floating rates. All swaps are subject
to hedge accounting in order to reduce as much as possible the fair value exposure. As the critical terms of the swaps match
the critical terms of the underlying debt, the hedge is highly effective. Changes in the fair value of the underlying debt,
attributable to changes in the credit spread are excluded from the hedging relationship.
At September 2007 Sappi had in total seven US$ swap contracts outstanding for a total amount of US$856.6 million and
the swaps had a negative total fair value of US$10 million (2006: seven contracts, total amount US$856.6, negative fair value
US$23 million).
At September 2007, Sappi had an interest rate and currency swap (IRCS) contract outstanding for the amount of
US$350 million with a positive fair value of US$136 million. This swap converts future US$ cash flows into GBP and fixed
US$ interest rates into fixed GBP interest rates (2006: US$350 million with a fair value of US$102 million).
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