SEO Version
109
28 FINANCIAL RISK MANAGEMENT (CONTINUED)
(d)
Interest rate risk
The Group’s exposure to changes in interest rates relates primarily to interest-bearing borrowings at floating
rates. Interest rate risk is managed by the Group on an on-going basis with the primary objective of limiting
the extent to which net interest expense could be affected by an adverse movement in interest rates. In order
to minimise exposure to changes to interest rates, the Group has purchased certain hedging instruments, the
purpose of which is to fix the interest rates payable on its loan facilities.
The Group finances its operations through a mixture of retained earnings, interest-bearing loans and borrowings
and stated capital. The Group borrows in the desired currencies at floating rates and uses interest rate swap
contracts to generate the desired interest rate profile and to manage the Group’s exposure to interest rate
fluctuations.
The Group completed a series of refinancing in December 2010 and unwound the interest rate swaps linked to
the replaced loans. Other than an interest rate swap with a notional principal amount of US$55.0 million effective
from 22 December 2011, the Group’s interest-bearing liabilities are at floating rates of interest at 31 December
2011. The fair value of the interest rate swap as at 31 December 2011 is a liability of $126,000. The Group is
considering new interest rate swap contacts for the bank loans. The interest rate swap with a notional principal
amount of US$135.0 million on the HQ loan is effective on 26 January 2012.
An interest rate cap, denominated in US Dollars, has also been entered into to limit the Group’s exposure to
changes in the interest rate on a US Dollar bank loan which bears interest at LIBOR plus margin. The notional
contract amount is US$37.8 million (equivalent to approximately $48.6 million) whereby the Group will receive
payments when the interest rate exceeds the agreed strike price of 2.825% between 10 December 2011 and
9 December 2012, exclusive of loan margin of 3.5%. The fair value of the interest rate cap as at 31 December
2011 was an asset of $4,000, (2010: $55,000).
As at the reporting date, the interest rate profile of the interest-bearing financial instruments was as follows:
2011
2010
$’000
$’000
Fixed rate instruments
Cash and cash equivalents
19,794
67,448
Debt securities
(69,493)
–
(49,699)
67,448
Variable rate instruments
Cash and cash equivalents
25,804
36,482
Interest-bearing borrowings
(855,284)
(666,275)
(829,480)
(629,793)
SAR1112034_TCT_AR_().indb 109
3/23/2012
Powered by FlippingBook Publisher