SAPPI LIMITED

SAPPI
NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS (Continued)
for the year ended September 2010
29. FINANCIAL INSTRUMENTS (Continued)
2. Cash flow hedges
In August 2009, Sappi entered into a fixed for fixed interest and currency swap, which has been
designated as a cash flow hedge of future cash flows linked to fixed rate debt denominated in foreign
currency. The swap corresponds to the underlying US$300 million Senior Secured Notes due 2014. The
swap converts all future US$ cash flows into EUR.
The effective gains and losses from changes in fair value of these derivatives are recorded in 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.
3. Net investment hedges
In February 2010, Sappi designated a hedge of a net investment for an indeterminate period of
Sappi Papier Holding (‘‘SPH’’) in SD Warren Holdings Corporation (‘‘SFPNA’’) including all its
subsidiaries and incorporating all net assets. The hedged risk is the currency risk associated with the
spot re-translation of the net assets of the foreign operation into the functional currency of the
consolidating parent entities at the level of which the hedge is designated, i.e. SPH for USD-EUR spot
exchange risk and Sappi Ltd for USD-ZAR spot exchange risk. The hedging instrument is a
non-derivative foreign currency external debt. At inception of the hedge both, the net investment in the
foreign operation (as hedged item) and the foreign currency denominated debt (as hedging instrument),
have been recorded at the spot rate in effect on the hedge designation date.
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