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

2. 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

3. 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

4. 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!

5. 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

6. 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

7. 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Lines are uncommitted – can be withdrawn at any point in time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!

8. 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

9. 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

10. 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

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