SAPPI LIMITED

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<strong>SAPPI</strong> 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. F-97
<strong>SAPPI</strong> NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS (Continued) for the year ended September 2010 29. FINANCIAL INSTRUMENTS (Continued) Exchange differences linked to the subsequent revaluation of the foreign currency debt in the books of the entity holding the debt are deferred in other comprehensive income to the extent effective until the foreign operation is disposed of or liquidated. They are recognised in the income statement on disposal or liquidation as part of the gain or loss on disposal. Ineffectiveness can only occur if the net investment carrying value of the foreign operation would fall below the designated amount of the hedging instruments. The net investment value of the foreign operation is validated each quarter. Ineffective gains and losses are booked directly to the income statement. As at the end of fiscal 2010, the hedge was 100% effective. 2010 2009 Foreign Exchange Foreign Exchange result deferred result deferred in other in other Hedged comprehensive Hedged comprehensive Favourable notional income notional income Bond 2012 ......................... 227 2 (US$ million) — — Bond 2032 ......................... 30 — — — Net investment value Sappi Fine Paper North 257 2 — — America .......................... 310 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. F-98
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As filed with the Securities and Ex
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Item 7. Major Shareholders and Rela
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References to ‘‘NBSK’’ are
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PART I ITEM 1. IDENTITY OF DIRECTOR
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Risk Factors In addition to other i
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For further information, see ‘‘
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terms of the debt being refinanced.
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The inability to recover increasing
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A large percentage of our employees
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merge or consolidate with other com
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we operate. The transaction was app
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currencies as we can benefit from i
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Major Product Categories Pulp: Desc
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for coated mechanical paper decline
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The chart below represents our oper
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The following table sets out the ap
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The following table sets forth sale
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Kangas. As a direct result of the g
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Customers Sappi Fine Paper sells it
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The following chart sets forth cert
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Construction on the expansion proje
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lease extendable to 2089. The locat
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North America Wood In connection wi
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Pulp Sappi Fine Paper Europe produc
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ENVIRONMENTAL AND SAFETY MATTERS En
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and management of forests are all r
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ORGANIZATIONAL STRUCTURE Sappi Limi
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Approximate Secured / Location Use
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than we use. By region, the South A
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‘‘—Markets’’ for a furthe
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'000 metric tonnes 8,000 7,000 6,00
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The price of NBSK and Bleached Hard
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ZAR/US$ 16.00 14.00 12.00 10.00 8.0
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The fiscal period average three-mon
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employees from the beginning of 200
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The Sappi Southern Africa reportabl
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Movements in operating profit and o
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Operating profit in fiscal 2009 was
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Sappi Southern Africa Key figures:
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Comparing fiscal 2010 with fiscal 2
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This comparison includes the closur
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African operations into the US doll
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Sappi Fine Paper North America Comp
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Taxation 2010 2009 (US$ million) 20
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elation to inventory levels and rec
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Capital expenditure by region is as
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Over the past three years the relat
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Group’s securitization programs,
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Credit Facility terminate on May 31
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quarters ending from January 2012 t
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As no default event has occurred, n
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In addition, Sappi Fine Paper North
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areas where our South African busin
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Recoveries in equity markets couple
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Impairment of assets other than goo
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The gains or losses, which are reco
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The Group’s policy is to recogniz
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ITEM 6. DIRECTORS, SENIOR MANAGEMEN
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Deenadayalen (Len) Konar Sappi boar
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Mohammed Valli (Valli) Moosa Other
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Rudolf Thummer Sappi board committe
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Executive Officers The Executive Di
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companies have to comply with domes
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average more than 45% of the employ
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For a detailed description of the S
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Pursuant to the Companies Amendment
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Post transaction shareholding struc
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Dividends We consider dividends on
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ITEM 9. THE OFFER AND LISTING Offer
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ITEM 10. ADDITIONAL INFORMATION Mem
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holder of the beneficial interest i
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Voting Rights Subject to any rights
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provision of the New Act by any oth
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South African Companies Act, 2008 A
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state securities laws. The securiti
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documents are the agent for the new
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Dividends There are no restrictions
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STC STC is imposed on South African
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with any connected persons) held mo
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of our ordinary shares or ADSs, as
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of gain recognized on a sale or oth
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integrated operations could be adve
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PART II ITEM 13. DEFAULTS, DIVIDEND
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(d) Changes in Internal Control ove
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PART III ITEM 17. FINANCIAL STATEME
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4.13 Credit Agreement, dated August
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SIGNATURES The registrant hereby ce
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REPORT OF THE INDEPENDENT REGISTERE
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SAPPI GROUP STATEMENT OF COMPREHENS
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SAPPI GROUP CASH FLOW STATEMENT for
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SAPPI NOTES TO THE GROUP ANNUAL FIN
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10. PLANTATIONS SAPPI NOTES TO THE
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SAPPI LIMITED

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