Our performance in 2009 - Sappi

30. Financial instruments continued
Interest rate derivatives
2009 annual report
Sappi uses interest rate options, caps, swaps (IRS) and interest rate and currency swaps (IRCS) 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 measured at fair value at each
reporting date with changes in fair value recorded in profit or loss for the period or in equity, depending on certain hedge
designations carried out by the group in a documented hedging strategy.
Until June 2009, the group had in total seven US$ interest rate swaps, converting fixed rates to floating rates for a total
amount of US$857 million.
In June 2009, these swaps were sold for a total positive value of US$55 million and the underlying debt now carries the
original fixed interest rates. The total difference between Sappi’s valuation on the date of sale and the effective sales price
of the swaps amounted to US$20 million. This difference predominately related to the payment of certain selling costs
(breakage fees of US$13 million, a liquidity reduction and some smaller trading rate differences).
In August 2009, Sappi entered into seven new fixed for fixed interest and currency swaps with different banks, which have
been designated as cash flow hedges of future cash flows linked to fixed rate debt denominated in foreign currency. Each
swap corresponds to the hedged portion of the underlying US$300 million senior secured notes due 2014. The swaps
convert all future US$ cash flows into Euro.
The effective gains and losses from changes in fair value of these derivatives are recorded in other comprehensive income.
These accumulated gains and losses will be recycled to profit or loss in the same line as the hedged item at the moment the
hedged item affects the income statement (interest expense and foreign currency revaluation).
In order to measure hedge effectiveness, a hypothetical derivative with identical critical terms as the hedged item, has been
built as a perfect hedge. The changes in fair value of the actual derivatives are compared with the changes in fair value of
the hypothetical derivative.
As at September 2009, the effectiveness tests for the above mentioned hedges showed a 100% hedge effectiveness.
The swaps showed a total negative fair value of US$24 million, the negative fair value of the currency leg of the swap of
US$10 million was booked to profit or loss to offset the corresponding foreign currency unrealised gain of the revaluation of
the underlying hedged item, whereas the remaining negative fair value of the interest leg of the swap of US$14 million was
deferred in equity.
The existing interest rate and currency swap contract converting future US$ cash flows into GBP and fixed US$ interest
rates into fixed GBP interest rates (2008: US$233 miilion with a fair value of US$57 million) has an outstanding amount of
US$117 million at September 2009 with a positive fair value of US$10 million. This derivative is not designated as a hedge
in a documented hedge strategy. The changes in fair value of this instrument are booked in profit or loss for the period.
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financials