IACT/CSCA Joint presentation 15 March 2005 Treasury Risk Matters 2005

Presentation Outline 1. Interest rate risk management issues 2. Foreign exchange risk management issues 3. Derivatives and Credit 4. Derivatives documentation 5. New accounting pronouncements 6. Other sundry issues 7. Summary

Interest Rate Risk Management Facility agreements normally state interest rate periods (1,3, 6 months) and whether or not there is a fixed rate option. Insist on a fixed rate option No need to fix 100%/have one shot at fixing Also possible to fix for different periods e.g. fix 30% for 2 years, another 30% for 3 years, etc. Banks have some discretion in setting longer-term rates, hence need to check these

Interest Rate Risk Management Be careful about period for which rates are fixed as: Period of fixing should not exceed period for which core debt exists Always need to keep a certain % variable to allow for better than expected cash generation to repay debt (don’t want simultaneous cash and debt) Much easier to move from variable to fixed than vice versa as there may be breakage costs What banks want may not be economically optimal, they may be motivated by ease of administration!

Interest Rate Risk Management Options can be very useful in IRRM Banks may also quote them as capped loans Premium is know upfront where purchased Can be structured at zero cost but beware of associated risks Need to understand the product having got independent financial advice DO NOT SELL options as a means of raising income. This is absolutely essential to understand

FX Risk Management Ability to transact FX instruments governed by written/oral agreement with the bank Market more volatile than for interest, hence need to be more proactive in management Similar array of instruments - forwards, options Reporting tends to be poor in this area Mark-to market risk becoming more important Understand dynamics between margin attainment and FX rates

Derivatives and Credit Banks must allocate lines to allow companies to manage FX and interest rates Ties up capital based on 10% of principal Lines are uncommitted – can be withdrawn at any point in time Banks will take it into account in calculating maximum credit limit for companies Internal bank issues – dealers versus corporate banking!

Derivatives and Documentation Banks have tightened up significantly here May want to review M&A’s of Company Lines may be formally documented Need to put dealing mandates in place Possible ISDA agreement Right of set-off Other forms required to absolve them from liability

New Accounting Pronouncements Driven by IAS 32 and IAS 39 IAS 32 disclosure covers areas such as price risk (currency, interest rate and market risk), credit risk, risk management policies, etc Details may include notional amounts, date of maturity, amount/timing of future cashflows, fair value bases and calculatuions, etc. Definitions of hedging tightened up

New Accounting Pronouncements IAS 39 very problematic – agreedment to revisit already and EU failed to adopt in full Implications for all companies only beginning to be assessed Potential to create friction with auditors? Impact on financial covenants? Could be very technical

IACT/CSCA Joint presentation 15 March 2005 Treasury Risk Matters 2005