New Zealand Gazette – 2012 – No. 140

Page 4103

✨ Financial Risk Analysis

23 NOVEMBER 2012 NEW ZEALAND GAZETTE, No. 140 4103

TRANSPOWER NEW ZEALAND LIMITED LINES BUSINESS

The credit risk arising from the use of derivative products is minimised by the netting and set-off provisions contained in the Group’s International Swap Dealer Agreements (ISDAs). Under these agreements, transactions are net settled therefore the maximum credit exposure is best represented by the net mark to market valuation by counterparty where the valuation is positive, as follows:

	2012	2011
	$M	$M
Cross currency interest rate swaps	103.0	86.9
Interest rate swaps	-	-
Basis swaps	-	1.4
Interest rate options	-	-
Foreign exchange forward contracts	-	-
Total	103.0	87.3

Credit spreads
Credit spreads are an estimate of the additional premium over the relevant yield curve that would be required by market participants to compensate them for the perceived risk inherent in the counterparty and transaction. For derivative transactions, the impact of credit spreads is substantially lower than for debt and investment transactions due to the offsetting nature of the cash flows.

The following table shows the impact of credit spread movements on debt, derivatives and investments on fair value

	2012	2011
	$M	$M
Fair value Profit / (loss) impact	159.4	(8.8)
Statement of financial position impact - (Increase)/decrease in liabilities	(216.5)	55.6
Statement of financial position impact - (Increase)/decrease in assets	0.9	0.4

V. Sensitivity analysis

Currency risk - debt
All foreign currency debt is converted back to NZD denominated exposure, therefore no sensitivity analysis has been performed for foreign currency debt.

Fair value risk
The Group’s net debt is designated as "fair value through profit or loss". As such, the Group is subject to fair value gains or losses. The extent of the gains or losses is based on the Group’s cash flow profile compared to the corresponding movement in the yield curve and market perceptions on credit risk. For debt, derivatives and investments the relevant yield curve is effectively adjusted for the credit margin (or spread).

A parallel shift in the yield curve by 1% (100 basis points) would create the following fair value movements based on Group net debt held at 30 June 2012.