2008 Annual report - Sappi

sappi //
30. Financial instruments (continued)
Commodity risk
Commodity risk arises mainly from price volatility and threats to security of supply.
A combination of contract and spot deals are used to manage price volatility and contain costs. Contracts are limited to the
group's own use requirements. The group aims to improve its understanding of the direction, magnitude and duration of future
commodity price changes and to develop commodity specific expertise.
The group manages security of supply by establishing alternate sources of supply and focusing on products and processes
that allow the use of alternative commodities. Sappi examines its supply and quality risk on an ongoing basis with the view
to continuously improve its commodity management practices.
During 2008 we have not contracted any derivatives with respect to commodities.
b) Credit risk
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in a financial loss to the
group. The group faces credit risk in relation to trade receivables, cash deposits and financial investments.
Credit risk relating to trade debtor management is the responsibility of regional management and is co-ordinated on a
group basis.
The group’s objective in relation to credit risk is to limit the exposure to credit risk through specific group-wide policies and
procedures. Credit control procedures are designed to ensure the effective implementation of best trade receivable practices,
the comprehensive maintenance of all related records, and effective management of credit risk for the group.
The group assesses the credit worthiness of potential and existing customers in line with the credit policies and procedures.
Appropriate collateral is obtained to minimise risk. Exposures are monitored on an ongoing basis utilising various reporting
tools which highlight potential risks.
In the event of deterioration of credit risk, the appropriate measures are taken by the regional credit management. All known
risks are required to be fully disclosed, accounted for, and provided for as bad debts in accordance with the applicable
accounting standards.
Quantitative disclosures on credit risk are included in note 16 of the annual financial statements.
A large percentage of our trade receivables are credit insured.
Hedge accounting
The group has the following fair value hedges which qualify for hedge accounting:
Bonds at fixed interest rates for a total notional amount of US$856 million are hedged by seven external interest rate swaps
(IRS). These IRS with a positive fair value of US$18.7 million convert the US$ fixed interest rates into floating 6-month LIBOR
set in arrears. The hedged risk is designated to be the interest rate risk arising from fluctuations in the US LIBOR swap curve.
The effect of this transaction is to convert fixed rate debt into floating rate debt.
In fiscal 2005 the hedge was de-designated at the end of March, April and June 2005 respectively and was only re-designated
in June 2005. During this period, hedge accounting was interrupted for a certain number of deals. The changes in fair value
of the bonds until the moment of de-designation are amortised over the remaining life of the hedge.
// 2008 Annual report
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