Our performance in 2009 - Sappi

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Notes to the group annual financial statements continued
16. Trade and other receivables continued
16.3 Fair value
The directors consider that the carrying amount of trade and other receivables approximates their fair value.
16.4 Trade receivables pledged as security
Trade receivables with a value of US$460 million (2008: US$415 million) have been pledged as collateral for amounts
received from the banks in respect of the securitisation programme. The value of the associated liabilities at year end
amounted to US$400 million (2008: US$360 million). The group is restricted from selling and repledging the trade receivables
that have been pledged as collateral for the liability.
16.5 Off balance sheet structures
Letters of credit discounting
To improve the group working capital, the group sells certain letters of credit to ABN AMRO Hong Kong and DBS Bank
(London) at every financial month end on a non-recourse basis.
‘Scheck-Wechsel’
The Scheck-Wechsel is a financial guarantee supplied by Sappi to the bank of certain customers (trade receivables) who
wish to obtain a loan to finance early payment of specified 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 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 IAS 37 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 has been set up and the fair value at year end remains at zero. However,
according to IAS 37 a contingent liability of US$25 million (2008: US$20 million) has been disclosed in this respect.
Trade receivables securitisation
To improve their cash flows in a cost-effective manner, Sappi Fine Paper North America, Sappi Fine Paper Europe and Sappi
Trading sell all 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 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 servicers for the collection of cash and administration of the trade receivables sold.
Sappi Forest Products securitisation facility
Sappi sells the majority of its ZAR receivables to FirstRand Bank Limited, which issues commercial paper to finance the
purchase of the receivables. Sappi does not guarantee the recoverability of any amounts, but shares proportionately with
FirstRand Bank Limited the credit risk of each underlying receivable, after all recoveries, including insurance recoveries, with
Sappi bearing 15% of such risk (and FirstRand Bank Limited the remainder). Sappi administers the collection of all amounts
processed on behalf of the bank 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 Interbank Agreed Rate) plus a spread. This structure is currently treated as an off balance sheet arrangement.
The total amount of trade receivables sold at the end of September 2009 amounted to US$171 million (September 2008:
US$194 million). Details of the securitisation programme at the end of fiscal 2009 and 2008 are disclosed in the
tables below.
If this securitisation facility were 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 the 15% mentioned above. There are a number of
events which may trigger termination of the facility, amongst others, an amount of defaults above a specified level; terms
and conditions of the agreement not being met; or breaches of various credit insurance ratios.
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.