Our performance in 2009 - Sappi

30. Financial instruments continued
Commodity risk
Commodity risk arises mainly from price volatility and threats to security of supply.
2009 annual report
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.
During 2009, 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
1. Fair value hedges
Until June 2009, the group had the following fair value hedges which qualified for hedge accounting.
Bonds at fixed interest rates for a total notional amount of US$856 million were hedged by seven external interest rate
swaps (IRS). These interest rate swaps converted the USD fixed interest rates into floating six-month LIBOR set in arrears.
The hedged risk was designated to be the interest rate risk arising from fluctuations in the US LIBOR swap curve. The effect
of this transaction was to convert fixed rate debt into floating rate debt.
In June 2009, these swaps were sold for a total positive value of US$55 million (on a clean basis, excluding interest accruals)
and the underlying debt now carries the original fixed interest rates. A net loss of US$18 million was booked to the income
statement.
177
financials