2006 20-F - Sappi

SAPPI
NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS (Continued)
for the year ended September 2006
31. FINANCIAL INSTRUMENTS (Continued)
Interest rate risk
Sappi has a policy of maintaining a balance between fixed rate and variable rate loans that enables it
to minimise, on a cost effective basis, the impact on reported earnings while maintaining a reasonably
competitive, market-related cost of funding. The specific balance is determined separately for the
European, North American and southern African businesses of Sappi to reflect more accurately the
different interest rate environments in which these businesses operate. We monitor market conditions and
may utilise interest rate derivatives to alter the existing balance between fixed and variable interest loans in
response to changes in the interest rate environment.
Currency risk
Sappi’s foreign exchange policy consists of the following principal elements:
• The majority of the borrowings in each country are made in the currency of that country.
• Translation risks are not hedged. As a general rule we manage our relative debt and equity ratios by
financing our investments in different currencies with similar debt to asset ratios.
• All external borrowings raised in currencies other than the domestic operating currency of the
borrowing entity are immediately and continuously protected by forward exchange contracts.
• All consummated (i.e. invoiced) sales and purchases in foreign currencies are initially netted on a
global basis, with the resulting net exposure generally being covered by forward exchange contracts
against subsequent fluctuations in exchange rates.
• Hedging against trading transactions not yet invoiced is limited. Deviations from these rules require
specific board approval.
The limitations referred relate to:
• material capital expenditures for which forward exchange contracts are always taken out as and
when the expenditure is committed; and
• anticipated exports and imports where the purchase of forward exchange contracts/currency
options is restricted to a limited portion of expected orders.
• No speculative positions are permitted.
Credit risk
A significant portion of the group’s sales and accounts receivable are from major customers. Only one
of the group’s major customers, represents more than 10% of our sales during the year ended
September 2006. These sales were recorded in Sappi Fine Paper. The sales for the year ended
September 2006 to PaperlinX Limited amounted to US$651 million (September 2005: US$580 million).
The trade receivables balance, net of securitisation, outstanding on balance sheet at September 2006 was
US$58 million (September 2005: US$42 million). Where appropriate, credit insurance has been taken out
over the group’s trade receivables.
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