Notes 26-30
- 26. Capital notes
- 27. Term debt
- 28. Financial Instruments
- 29. Capital expenditure commitments of plant and investments
- 30. Lease commitments
Back to top26. Capital notes
Capital notes are long-term fixed rate unsecured subordinated notes. On each election date, the coupon rate and term to the next election date of that series of the capital notes is reset. Holders may then choose either to keep their capital notes on the new terms or to convert the principal amount and any accrued but unpaid interest into shares, at approximately 98 percent of the current market price. Instead of issuing shares to holders who choose to convert, Fletcher Building may, at its option, purchase or redeem the capital notes for cash at the principal amount plus any accrued but unpaid interest.
Under the terms of the capital notes, non-payment of interest is not an act of default although unpaid interest is accrued and is interest bearing at the same rate as the principal of the capital notes. Fletcher Building Limited has covenanted not to pay dividends to its shareholders while interest that is due and payable on capital notes has not been paid.
The capital notes do not carry voting rights and do not participate in any change in value of the issued shares of Fletcher Building Limited.
If the principal amount of the capital notes held at 30 June 2009 were to be converted to shares, 65 million shares (June 2008 57 million shares) would be issued at the share price as at 30 June 2009, of $6.58 (June 2008 $6.35).
As at 30 June 2009 the group held $83 million (30 June 2008 $43 million) of capital notes as treasury stock.
Back to top27. Term debt
Loans subject to the negative pledge
The group borrows funds based on covenants and a negative pledge and guarantee arrangement. The principal borrowing covenants relate to gearing and interest cover, and at 30 June 2009 the group was in compliance with all its covenants. The negative pledge ensures that external senior indebtedness ranks equally in all respects and includes the covenant that security can be given only in very limited circumstances.
Loans not subject to the negative pledge
Loans not having the benefit of the negative pledge are secured against the subsidiaries’ own balance sheet or against specific assets.
Unused committed lines of credit
At 30 June 2009 the group had $2,149 million of committed bank facilities of which $1,142 million was undrawn (June 2008 $1,988 million; $378 million).
For further information about the terms of these loans, please refer note 28.
Credit rating
The company does not hold a credit rating from an accredited rating agency.
Back to top28. Financial instruments
Financial risk management overview
Exposures to credit, liquidity, currency, interest rate, and commodity price risks arise in the normal course of the group’s business. The principles under which these risks are managed are set out in policy documents approved by the board. The policy documents identify the risks and set out the group’s objectives, policies and processes to measure, manage and report the risks. The policies are reviewed periodically to reflect changes in financial markets and the group’s businesses. Risk management is carried out by a central treasury, which ensures compliance with the risk management policies and procedures set by the board.
The group enters into derivative financial instruments to assist in the management of the identified financial risks. The group does not enter into derivative financial instruments for trading or speculative purposes. All derivative transactions entered into are to hedge underlying physical positions arising from normal business activities.
Risks and mitigation
(a) Credit risk
To the extent the group has a receivable from another party there is a credit risk in the event of non-performance by that counterparty and arises principally from receivables from customers, derivative financial instruments and the investment of cash.
(i) Trade receivables
Management has a credit policy in place under which customers are individually analysed for credit worthiness and assigned a purchase limit. If no external ratings are available, the group reviews the customers’ financial statements, trade references, bankers’ references and/or credit reporting agencies to assess credit worthiness. These limits are reviewed on a regular basis. Due to the group’s industry and geographical spread at balance date there were no significant concentrations of credit risks in respect of trade receivables. Most goods are sold subject to retention of title clauses, so that in the event of non-payment the group may have a secured claim. The group does not require collateral in respect of trade receivables.
(ii) Derivative financial instruments and the investment of cash
The group enters into derivative financial instruments and invests cash with various counterparties in accordance with established limits as to credit rating and dollar value and does not require collateral or other security. In accordance with the established counterparty restrictions, there are no significant concentrations of credit risk in respect of the financial instruments and no loss is expected.
(b) Liquidity risk
Liquidity risk is the risk that the group will encounter difficulty in meeting its financial commitments as they fall due. The group manages its liquidity risk by maintaining a target level of undrawn committed facilities and a spread of the maturity dates of the group’s debt facilities. The group reviews its liquidity requirements on an ongoing basis.
(c) Foreign currency risk
(i) Currency translation risk
Currency translation risk arises from net investments in foreign operations. It is the group’s policy to hedge this foreign currency translation risk by borrowing in the currency of the asset in proportion to the group’s debt to equity ratio. This reduces the variability in the debt to equity ratio due to currency translation. Where the underlying debt in any currency does not equate to the required proportion of total debt, foreign exchange forwards, swaps and cross currency interest rate swaps are entered into for up to seven years. Net investment and fair value hedge accounting is applied to these instruments. In addition the group has entered into foreign exchange derivatives to hedge the taxation exposure arising from the translation of certain assets for up to eight years. Cashflow hedge accounting is applied to these instruments.
(ii) Currency transaction risk
Currency transaction risk arises from committed or highly probable trade and capital expenditure transactions that are denominated in currencies other than the operation’s functional currency. The objective in managing this risk is to reduce the variability from changes in currency exchange rates on the operation’s income and cashflow to acceptable parameters. It is group policy that no currency exchange risk may be entered into or allowed to remain outstanding should it arise on committed trade transactions. In addition the group hedges some highly probable forecast transactions for up to three years. When exposures are incurred by operations in currencies other than their functional currency, currency forwards, swaps and options are entered into to eliminate the exposure. The majority of these transactions have maturities of less than one year. Cashflow hedge accounting is applied to forecast transactions. The main currencies hedged are the Australian dollar, the United States dollar, the Japanese yen, the Euro and the British pound.
(d) Interest rate risk
Interest rate risk is the risk that the value of a financial instrument or cashflows associated with the instrument will change due to changes in market interest rates and arises primarily from the group’s interest bearing borrowings. It is group policy to manage the fixed interest rate component of its debt and capital notes obligations within the range of 40 to 70 percent. The position in this range is managed depending upon underlying interest rate exposures and economic conditions. Cross currency interest rate swaps, interest rate swaps, forward rate agreements and options are entered into to manage this position. Currently cross currency interest rate swaps and interest rate swaps have been entered into in Australian dollars, United States dollars, Euros, British pounds and New Zealand dollars which mature over the next ten years in relation to the maturity of the related loans.
Hedge accounting is applied on these instruments for floating-to-fixed instruments as cashflow hedges or for fixed-to-floating as fair value hedges.
(e) Commodity price risk
Commodity price risk arises from committed or highly probable trade and capital expenditure transactions that are linked to traded commodities. Where possible the group manages its commodity price risks through negotiated supply contracts and, for certain commodities, by using commodity price swaps and options. The group manages its commodity price risk depending on the underlying exposures, economic conditions and access to active derivatives markets. Currently the group’s guideline is to hedge up to 100 percent of the New Zealand business units’ electricity requirements for up to five years. Cashflow hedge accounting is applied to commodity derivative contracts.
Quantitative analysis
(a) Credit risk
The group has not renegotiated the terms of any financial assets which would otherwise be past due or impaired. The carrying amount of non-derivative financial assets represents the maximum credit exposure. Please refer to note 16 for debtor ageing analysis.
(b) Liquidity risk
The following maturity analysis table sets out the remaining contractual undiscounted cashflows, including estimated interest payments for non-derivative liabilities and derivative financial instruments. Other loans include financial leases, discounted receivables, overdrafts and working capital facilities.
The maturity profile of undrawn facilities is outlined below:
(c) Foreign currency risk
The group’s exposure to foreign currency risk on financial instruments is summarised as follows:
Trade-related forward exchange contracts and options are used to hedge a business unit’s forecast sales, forecast purchases, trade debtors, trade creditors and capital expenditure back to its functional currency. Accordingly in the above table the net trade exposures do not net to zero. Other currencies may include Japanese yen, Swiss francs, Danish kroner, Hong Kong dollars, Hungarian florins, Swedish kroner, Singaporean dollars and Canadian dollars.
(d) Interest rate risk
The following tables set out the interest rate repricing profile and weighted average interest rate of interest bearing financial assets and liabilities.
(e) Commodity price risk
One of the group’s commodity price risks is the New Zealand electricity spot price. Electricity is required for the group’s production processes and due to price volatility it is the group’s policy to hedge forecast usage for up to five years and up to 100 percent of forecasted volumes. At balance date, the notional value of fixed electricity exposure was as follows:
(f) Sensitivity analysis
The numbers in the sensitivity analysis for foreign currency risk, interest rate risk and commodity price risk have not been adjusted for tax and are based only on the group’s financial instruments held at balance date and assumes that all other variables remain constant, except for the chosen change in risk variable.
(i) Foreign currency risk
It is estimated a 10 percent weakening of the New Zealand dollar against the major foreign currencies the group is exposed to through financial instruments would result in a decrease to equity of approximately $88 million (June 2008 $98 million) and increase the group’s profit by less than $1 million (June 2008 $1 million). If the translation of the net assets of the foreign operations were included this would result in an increase to equity of approximately $185 million (June 2008 $187 million).
(ii) Interest rate risk
It is estimated a 1 percent increase in interest rates would have increased the group’s interest costs by approximately $2 million on the group's debt portfolio exposed to floating rates at balance date (June 2008 $8.4 million).
(iii) Commodity price risk
It is estimated a 10 percent increase in the New Zealand electricity spot price at balance date would have increased the group’s profit by $1 million as the group had fixed 107 percent of its electricity usage (June 2008 $1 million loss, fixed 93 percent).
(g) Fair values
The estimated fair values measurements for financial assets and liabilities as compared to their carrying values in the balance sheet, are as follows:
In the fair value tables, interest accruals and fees are not included within carrying values. Fair value measurement are disclosed by the source of inputs, using the following three-level hierarchy:
(Level 1) Quoted prices (unadjusted) in active markets for identical assets or liabilities.
The fair value of base metal price swaps is based on the quoted market prices of those instruments.
(Level 2) Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices).
The approximate fair value of trade and other receivables and payables and cash and liquid deposits is the carrying value given their short-term duration. The fair value of loans and interest rate derivatives is based on the net present value of the future principal and interest cashflows, discounted at the government stock or swap interest rate curves plus an applicable margin. The fair value of foreign currency derivatives is measured using quoted forward exchange rates and discounted using yield curves derived from quoted interest rates matching maturities of the contracts. The fair value of electricity price swaps is measured using a derived forward curve and discounted using yield curves derived from quoted interest rates matching maturities of the contracts.
(Level 3) Inputs for the asset or liability that are not based on observable market data (unobservable inputs).
(h) Capital risk management
The group’s objectives when managing capital are to safeguard the group’s ability to continue as a going concern in order to provide returns to shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.
In order to maintain or adjust the capital structure, the group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.
The group monitors capital on the basis of debt to debt plus equity and aims to maintain this ratio between 40 percent to 50 percent in the long term.
Back to top29. Capital expenditure commitments of plant and investments
Back to top30. Lease commitments
The expected future minimum rental payments required under operating leases that have initial or remaining non-cancellable lease terms in excess of one year are at year end:
