Abacus Property Group – Annual Financial Report 2017

NOTES TO THE FINANCIAL STATEMENTS
30 JUNE 2017
ABACUS PROPERTY GROUP
12. FINANCIAL INSTRUMENTS (continued)
(c) Market Risk
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity
prices will affect the Group’s income or the value of its holdings of financial instruments. The objective of market
risk management is to manage and control market risk exposures within acceptable parameters, while optimising
the return.
Interest rate risk / Fair value interest rate risk
The Group’s exposure to the risk of changes in market interest rates relates primarily to its long-term bank debt
obligations which are based on floating interest rates. The Group has a policy to maintain a mix of floating
exposure and fixed interest rate hedging with fixed rate cover highest in years 1 to 5.
The Group hedges to minimise interest rate risk by entering variable to fixed interest rate swaps which also helps
deliver interest covenant compliance and positive carry (net rental income in excess of interest expense) on the
property portfolio. Interest rate swaps have the economic effect of converting borrowings from variable rates to
fixed rates. Under the interest rate swaps, the Group agrees to exchange, at specified intervals, the difference
between fixed and variable rate interest amounts calculated by reference to the agreed notional principal
amounts. At 30 June 2017, after taking into account the effect of interest rate swaps, approximately 48.6% of the
Group’s drawn debt is subject to fixed rate hedges (2016: 53.2%). Hedge cover as a percentage of available
facilities at 30 June 2017 is 28.6% (2016: 38.3%).
As the Group holds interest rate swaps against its variable rate debt there is a risk that the economic value of a
financial instrument will fluctuate because of changes in market interest rates.
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