2007 Annual Report - Sappi

Chief financial officer’s report continued
The group has exercised options to acquire the assets currently
leased in terms of the Somerset PM3 and the Westbrook
biomass boiler leases shown above. We expect to finance these
acquisitions (together costing approximately US$95 million)
with debt and to bring these assets onto the balance sheet
during fiscal 2008.
by a Sappi Limited guarantee. For this reason the first two of
the three covenants mentioned below are measured on a
consolidated group level.
• Net debt to adjusted total capitalisation (on a basis agreed
with our lenders) should not exceed 65%.
The Forest Products securitisation programme involves the
outright sale of receivables to a financing vehicle and we expect
this funding to remain off-balance sheet for the foreseeable
future. For more information on this programme, please refer
to Note 17 to the Financial Statements.
Interest on borrowings
To compare our borrowing costs with market rates, we convert
interest rates on all debt to US Dollar equivalent rates. The
resulting interest rate is currently 5.38% before taking account
of interest rate swaps taken up to swap US$857 million of
borrowings from fixed to floating interest rates.
The average tenure of our debt is 6.6 years. Compared with
the current seven-year US Dollar swap rate (a benchmark rate
at which blue chip credits transact in longer term maturities) of
4.84%, our average interest cost is 54 basis points above the
swap rate.
The fixed to floating interest rate swaps increase the total
interest cost to 5.64%, which is 80 basis points above the
seven-year US Dollar swap rate.
We expect that in current market circumstances, and based on
our current credit ratings, raising new debt or replacing existing
debt would be at higher margins than we are currently paying.
Interest rate risk
The group has a policy of maintaining a balance between fixed
and variable rate loans which we believe minimises the impact
of borrowing costs on reported earnings. At present hedging
activity in relation to borrowings is restricted to interest rate
swaps and where appropriate, cross-currency swaps.
In the financial year no further interest rate swaps were concluded
and, at year end, the ratio of gross debt at fixed and floating
interest rates was 45:55 respectively.
Covenants
Financial covenants apply to approximately US$800 million of
our non-South African long-term debt. This debt is supported
• EBITDA to net interest should not be less than
(a) 3.0 times over four quarters’ average, and
(b) 3.5 times over eight quarters’ average.
• The Net Debt to Adjusted Total Capitalisation of Sappi
Manufacturing (Pty) Ltd, the subsidiary that owns virtually
all of our Southern African assets and operations, should
not exceed 65%.
The table below shows that as at 30 September 2007 we were
comfortably within these covenants.
US$ million 2007 Covenant
Group Covenants
Net debt to adjusted total capitalisation 51.7% 3.0
– 8 Quarters 4.35 >3.5
Sappi Manufacturing Covenant
Net debt to total capitalisation 43.2