Our performance in 2009 - Sappi

30. Financial instruments continued
2. Cash flow hedges
2009 annual report
In August 2009, Sappi entered into seven 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 equity under 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 profit or loss (interest expense and foreign currency revaluation).
Sappi uses the REVALHedgeRx module (REVAL), a web-based application providing treasury and risk management solutions
supplied by Reval.Com, Inc., a financial technology company based in New York to assess the fair value of the IRCS and to
measure the effectiveness of the cash flow hedge relationship.
At inception and at the beginning of each quarterly reporting period, the future effectiveness of the hedge relationship is
assessed using the critical terms match.
In order to measure retrospective hedge effectiveness a hypothetical derivative with identical critical terms as the hedged
item, has been built as a perfect hedge. The periodic Dollar-offset retrospective hedge effectiveness test is based on the
comparison of the actual past periodical changes in fair value between the hedging derivative and the hypothetical derivative.
The ratio of the periodic change in fair value of the hedging instrument since inception or since the last quarterly measurement
divided by the periodic change in fair value of the hypothetical derivative since inception or since the last quarterly
measurement for the hedge falls with the range of 80% to 125%. If, however, both changes in fair value are less than 1% of
the notional amount of the IRCS, these changes in fair value are considered to be both immaterial and the hedge effectiveness
test is met.
The counterparties of the hedging instruments are tested for creditworthiness on a quarterly basis. If the credit risk of a given
counterparty would fall under the minimum required rating, any positive fair value of the hedging instrument would be
adjusted to cater for the additional credit risk. This would not affect the hypothetical derivative.
c) Liquidity risk
Liquidity risk is the risk that the group will be unable to meet its current and future financial obligations as they fall due.
The group’s objective is to manage its liquidity risk by:
– managing its bank balances, cash concentration methods and cash flows;
– managing its working capital and capital expenditure;
– ensuring the availability of a minimum amount of short-term borrowing facilities at all times, to meet any unexpected
funding requirements; and
– ensuring appropriate long-term funding is in place to support the group’s long-term strategy.
Details of the group’s borrowings, including the maturity profile thereof, as well as the group’s committed and uncommitted
facilities are set out in note 20.
The group is in compliance with all material financial covenants applicable to its borrowing facilities.
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financials