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<strong>SAPPI</strong><br />
NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS (Continued)<br />
for the year ended September 2010<br />
29. FINANCIAL INSTRUMENTS (Continued)<br />
The above mentioned fair values include Sappi’s own credit risk. Please refer to the sensitivity<br />
analysis regarding interest rate risk for additional information regarding Sappi’s rating.<br />
The range of interest rates in respect of all non-current borrowings comprising both fixed and<br />
floating rate obligations, is between 4% and 12.48% (depending on currency).<br />
At September 2010, 80% of Sappi’s borrowings were at fixed rates of interest, and 20% were at<br />
floating rates. Fixed rates of interest are based on contract rates.<br />
A detailed analysis of the group’s borrowings is presented in note 20.<br />
Interest rate derivatives<br />
Sappi uses interest rate options, caps, swaps (IRS) and interest rate and currency swaps (IRCS) as<br />
a means of managing interest rate risk associated with outstanding debt entered into in the normal<br />
course of business. Sappi does not use these instruments for speculative purposes. Interest rate<br />
derivative financial instruments are measured at fair value at each reporting date with changes in fair<br />
value recorded in profit or loss for the period or in other comprehensive income, depending on certain<br />
hedge designations carried out by the group in a documented hedging strategy.<br />
In August 2009, Sappi entered into a new fixed for fixed interest and currency swap, which has been<br />
designated as a cash flow hedge of future cash flows linked to fixed rate debt denominated in foreign<br />
currency. The swap corresponds to the underlying US$300 million Senior Secured Notes due 2014. The<br />
swap converts all future US$ cash flows to EUR.<br />
The effective gains and losses from changes in fair value of these derivatives are recorded in other<br />
comprehensive income. These accumulated gains and losses will be recycled to profit or loss in the<br />
same line as the hedged item at the moment the hedged item affects the income statement (interest<br />
expense and foreign currency revaluation).<br />
In order to measure hedge effectiveness, a hypothetical derivative with identical critical terms as the<br />
hedged item, has been built as a perfect hedge. The changes in fair value of the actual derivatives are<br />
compared with the changes in fair value of the hypothetical derivative.<br />
As at September 2010, the effectiveness tests for the above mentioned hedges showed a 100%<br />
hedge effectiveness. The swaps showed a total positive fair value of US$19 million, the positive fair value<br />
of the currency leg of the swap of US$16 million was booked to profit or loss to offset the corresponding<br />
foreign currency unrealised gain of the revaluation of the underlying hedged item, whereas the<br />
remaining positive fair value of the interest leg of the swap of US$3 million was deferred in equity.<br />
The interest rate and currency swap contract converting US$ cash flows into GBP and fixed US$<br />
interest rates into fixed GBP interest rates matured on 31 December 2009.<br />
This derivative was not designated as a hedge in a documented hedge strategy.<br />
F-88
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