Currency risks and risk managementThe Group operates internationally and is exposed to foreign currency exchange risk arising mainly from US dollar (USD), Singapore dollar (SGD), Chinese yuan (CNY) and Brazilian real (BRL). Foreign currency exchange risk arises from future commercial transactions, recognized assets and liabilities and net investments in foreign operations.
The primary objective of the currency risk policy is to protect the value of Vopak’s cash flows. Account is taken of future cash flows from investments and disposals as well as cash flows from operating and financing activities. Each quarter, currency risks are identified and the hedging strategy is reviewed and subsequently presented to the Executive Board for approval.
The risks associated with commercial transaction positions arising from operating activitiesare limited for Vopak, since operating income and operating expenses are, as a rule, largely denominated in the same currencies. However, in some countries (in particular, in Latin America), a substantial portion of the income flow is in US dollar whereas the operating expenses are denominated in local currencies. In these countries, the aim is to hedge the transaction risk naturally. Any material net transaction position can be hedged in full by means of forward exchange contracts.
The main foreign currency risk results from investments in foreign operations whose net assets are exposed to foreign currency translation risk. The group result is also impacted by translating the result of foreign currency operations.
Translation risk arising from the investments in foreign operations
Net investments in foreign activities are, in principle, hedged by loans in the same currency and forward exchange contracts, while applying hedge accounting. The amount of the hedge is determined mainly by the expected net financing position/EBITDA ratio of subsidiaries for the next three years, taking into account the tax effects and hedging costs. In certain situations, such as in the event of new investments, the decision may be made to hedge more than would be possible on the basis of the optimal net financing position/EBITDA ratio. In such situations, the nominal value of the hedge might exceed the carrying amount of the underlying asset. As was the case in 2007, there were no hedges that exceeded the carrying amount of the underlying assets in the 2008 financial year.
In line with the currency risk policy, Vopak has converted fixed-interest loans totaling USD 160 million into fixed-interest loans for the amount of EUR 133.1 million by means of cross currency interest rate swaps (CCIRS) as the USD funding was higher than the related investments and loans in foreign operations. The fair value changes relating to the currency part of the principal of the CCIRS are recognized directly in the income statement offsetting the exchange differences on the hedged loans.
Prospective and retrospective hedge effectiveness tests are performed for hedge accounting purposes at each reporting date. The results of these effectiveness tests should satisfy the effectiveness criterion (between 80% and 125%) as defined in IAS 39. All hedges were effective in 2008 and 2007.
Sensitivity of exchange rate changes of financial instruments
The values of debt, hedging instruments, denominated in currencies other than the functional currency of the entities holding them are subject to exchange rate movements. The sensitivity analysis shows how changes in exchange rates affect net profit and shareholders’ equity. The sensitivity analysis for currency risks is based on the following assumptions:
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The translation risk on the foreign currency accounts receivable and accounts payables resulting from commercial transactions is excluded from this analysis as the risk is considered to be immaterial.
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The difference between the highest and lowest exchange rates on the reporting dates for the financial years was calculated to determine the reasonably possible change in exchange rates.
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Scenario analyses were performed in the treasury management system to determine the fair value change of derivative financial instruments.
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The currency risk on intercompany balances is taken into account in the analysis.
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The effect on net profit is measured for a one-year period.
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Showing the sensitivity for exchange differences on net investments is not required under IFRS 7 but is included as the movement of the hedges are offsetted by movements in the net investments.
The US dollar (USD), the Singapore dollar (SGD), the Chinese yuan (CNY) and the Brazilian real (BRL) were the main currencies for which Vopak ran translation risks. The sensitivity to these currencies for the balance sheet positions at 31 December 2008 and 31 December 2007 can be broken down as follows.
Sensitivity of balance sheet items at 31 December 2008
Sensitivity of balance sheet items at 31 December 2007
Sensitivity of exchange rate changes arising from the translation of the results of foreign currency operations
The Group result is also impacted by translating the result of foreign currency operations.
The translation risk of converting the net result of foreign entities into euro’s mainly concerns the Singapore dollar (SGD) and the US dollar (USD). The sensitivity to these currencies is as follows:
A 10 dollar cent change in the EUR/USD exchange rate approximately affects Vopak’s figures as
follows (based on figures for 2008):
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Income from rendering of services would differ by EUR 10.7 million (2007: EUR 11.4 million).
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Group operating profit (EBIT) would differ by EUR 3.6 million (2007: EUR 3.5 million).
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Net profit would differ by EUR 2.3 million (2007: EUR 2.2 million).
A 10 dollar cent change in the EUR/SGD exchange rate approximately affects Vopak’s figures as follows (based on figures for 2008):
- Net profit would differ by EUR 1.5 million (2007: EUR 1.5 million).
Interest rate risk and interest rate risk management
Vopak’s policy on interest rate risks aims to control the net finance costs resulting from fluctuations in market interest rates, taking into account the long-term profile of the company. Loans granted/Borrowings issued at fixed interest rates expose the group to fair value interest rate risk. Loans granted/Borrowings issued at variable rate expose the group to cash flow interest rate risk.
Interest rate swaps and interest rate options may be used to achieve the desired risk profile. Interest rate risks are identified and possible hedges considered when obtaining or providing new financing.
At 31 December 2008, taking account of interest rate swaps, 61% (2007: 81%) of the total interest-bearing loans of EUR 972.1 million (2007: EUR 672.2 million) was financed at a fixed interest rate with remaining terms of up to fourteen years. The reduced fixed rate portion is a result of increased floating funding via the revolver credit facility. As a consequence the company is both exposed to cash flow risk and fair value interest rate risk.
Hedging fixed USD interest rates to fixed EUR interest rates
As part of the interest rate risk policy, Vopak has converted fixed-interest loans totaling USD 160 million into fixed-interest loans for the amount of EUR 133.1 million by means of cross currency interest rate swaps (CCIRS). The objective of these hedges is to restrict fluctuations in interest rates as a result of a volatile USD. Cash flow hedge accounting is applied.
The hedge effectiveness is measured both prospectively and retrospectively. As a minimum, the tests are performed as at the reporting date. The results of these effectiveness tests should satisfy the effectiveness criterion (between 80% and 125%) as defined in IAS 39. All hedges were effective in 2008 and 2007.
Hedging floating interest rates to fixed interest rates
Vopak converted SGD 147 million of a floating rate bank loan of SGD 200 million into a fixed rate loan. Cash flow hedge accounting is applied to this hedge.
The hedge effectiveness is measured both prospectively and retrospectively. As a minimum, the tests are performed as at the reporting date. The results of these effectiveness tests should satisfy the effectiveness criterion (between 80% and 125%) as defined in IAS 39. All hedges were effective in 2008 and 2007.
Hedging fixed interest rates to floating interest rates
The current interest-bearing debt consists largely of fixed-interest financing in US dollars. In total, USD 100 million of this interest-bearing debt was converted into a floating rate debt through interest rate swaps. Fair value hedge accounting is applied to this hedge.
The hedge effectiveness is measured both prospectively and retrospectively. As a minimum, the tests are performed as at the reporting date. The results of these effectiveness tests should satisfy the effectiveness criterion (between 80% and 125%) as defined in IAS 39. All hedges were effective in 2008 and 2007.
Sensitivity of changes in market interest rates (IFRS 7)
The sensitivity analysis shows how changes in market interest rates affect net profit and shareholders’ equity, for which the analysis for interest rate risks is based on the following assumptions:
- The difference in market interest rates at 1 January and 31 December of the financial years was calculated to determine the reasonably possible change in market interest rates. However, due to the volatility of the market interest rates in 2008 Vopak has used a fixed percentage of 25% as a reasonable change at year-end 2008.
- Scenario analyses were performed in the treasury management system to determine the fair value change of derivative financial instruments.
- With non-derivative fixed-rate financial instruments, changes in market interest rates only affect profit if they are carried at fair value. As such, changes in the interest rate have no effect on the fixed-interest financial instruments of the Group as these are all recognized at amortized cost.
- The analysis includes the effect of changes in market interest rates on floating rate nonderivative financial instruments.
- The effect of changes in market interest rates on financial instruments allocated as hedges of a net investment in a foreign entity is recognized in the income statement under Finance costs and taken into account when performing the sensitivity analysis on the assumption that the amount of the hedge remains unchanged.
- The effect of changes in market interest rates on financial instruments allocated as cash flow hedge is recognized in the derivative financial instrument revaluation reserve component of shareholders’ equity and taken into account when performing the shareholders’ equity sensitivity analysis.
- In the event of a fair value hedge whereby a fixed interest rate is converted into a floating rate through an interest rate swap, the hedging instrument is carried at fair value and the changes in fair value are taken to the income statement. The hedged risk portion of the hedged positions is likewise recognized at fair value and the changes in value are taken directly to the income statement. Since the hedge relationship is virtually 100% effective, the effect of the movement in fair value of the hedging instrument is virtually completely compensated by the movement in fair value of the hedged position and as such do not have an impact on equity. The impact on the income statement is included in the analysis.
- Changes in the fair value of derivative financial instruments not forming part of a hedge relationship as referred to in IAS 39 are accounted for under Finance costs and are taken into account when performing sensitivity analyses.
- The effect on net profit is measured for a one-year period.
Sensitivity of changes in market interest rates for 2008
Sensitivity of changes in market interest rates for 2007
Other price risks
The group has no significant equity or bonds which are valued at fair value as available for sale or fair value through income statement.
Other price risks that could affect the value of financial instruments are indices and market prices. At 31 December 2008, financial instruments whose value depends on indices and market prices totalled EUR 0.1 million (2007: EUR 0.3 million).
