2008 Annual Report - SBM Offshore

SBM Offshore Annual Report 2008 / Report of the Board of Management65Country RiskThe Company has in the past evaluated overall countryrisk in discussions with banks and does not hold assetsin countries where insurance cover is unavailable. TheCompany is exposed to revenues from Brazil and Angolaand parent guarantee structures and insurance mitigatemost of that risk. The Company is now in the process ofevaluating country risk objectively and establishing creditlimits relative to total equity. Some operations are heldin regions which present identifiable risks of terrorismand general security and one asset (FPSO Mystras, nowsold) has been targeted. In such countries, the Companyendeavours to ensure that adequate protection measuresare in place and in the event that the available measuresare not adequate, the Company has declined to operateand even sold its interest.Funding RiskSuccess in obtaining new lease-and-operate contractsrequires significant amounts of debt to be arranged. Thisplaces pressure on the balance sheet but also providesan excellent opportunity to leverage higher returns onequity. The Company continues to be well supportedby its banks due to a good performance record and thehigh quality of its contracts. The funding risks on projectsare monitored from project inception and no new leaseproject requiring finance is bid or accepted without firsthaving received positive indications of financial support. Afive-year financial model is maintained to anticipate longerterm financing requirements.The current financial crisis is restricting the number ofbanks which are willing to engage in project financingactivities, and has raised the margins required by thosebanks continuing to offer liquidity.The issue of credit availability is being addressed bystudying alternative sources of finance, including exportcredit agencies and capital markets. The increased margincosts will be incorporated in new lease bid rates, and arecurrently mitigated by the exceptionally low level of US$base interest rates.LitigationFrom time to time, the Company has disputes withcounterparties concerning contractual requirementsand product performance. These are generally resolvedamicably but litigation and arbitration may arise causingadditional costs. The Company is not currently engaged inany litigation which it considers is likely to have a significanteffect on the Company’s future profits.Treasury and Liquidity riskThe Company is exposed to financial market risks; mainlyrelating to currency and interest rates. The functionaland reporting currency is US Dollars and almost alloffshore revenues are earned in US Dollars. There arehowever significant cost elements and some investmentsdenominated in Euros and other non-Dollar currenciesleading to potential exposures on costs and equity.The lease business is particularly capital intensive andsubstantially financed with floating rate debt giving rise tointerest rate exposures.The policy is to minimise profit volatility and hedge allsignificant currency and interest rate exposures as soonas they arise, using mainly fixed-rate instruments. Nospeculative activities are engaged in using financialinstruments. The market value risk on financial instruments(in particular interest rate swaps) can be significant and,under IFRS rules, variations do impact reported equityvalues or profitability where the hedge does not accuratelymatch the underlying exposure. The Notes to the FinancialStatements provide details of financial instrument policies,sensitivities to exchange rate or interest rate movements,accounting treatment and market values.