✨ Financial Risk Analysis
25 NOVEMBER 2013 NEW ZEALAND GAZETTE, No. 155 4351
TRANSPOWER NEW ZEALAND LIMITED LINES BUSINESS
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:
| 2013 | 2012 | |
|---|---|---|
| $M | $M | |
| Fair value Profit / (loss) impact | (43.3) | 159.4 |
| Statement of financial position impact - (increase)/decrease in liabilities | (43.3) | 159.4 |
| Statement of financial position impact - (increase)/decrease in assets | -172.2 | 215.5 |
V. Sensitivity analysis
Currency risk - debt
All foreign currency debt is converted back to NZD denominated exposure, eliminating foreign currency 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 risk (or spread).
A parallel shift in the yield curve by 1% (100 basis points) would create the following fair value movements based on net debt held at 30 June 2013:
| Yield curve interest rate change: | 2013 | 2013 | 2012 | 2012 |
|---|---|---|---|---|
| +100bp | -100bp | +100bp | -100bp | |
| $M | $M | $M | $M | |
| Yield curve impact on pre-tax profit / (loss) / equity | 58.2 | (60.1) | 155.9 | (168.5) |
The significant change in yield curve impact is due to medium to long term interest rates now being floating rather than fixed.
(d) Financial risks - operating related
i.
Currency risk - foreign purchases
Currency risk is the risk of the adverse impact of exchange rate movements, which determine the NZD cost of foreign denominated purchases. It is the Group's policy to hedge all committed foreign currency denominated payments greater than NZD 1 million (NZD equivalent) by using forward foreign exchange forward contracts to fix or offset the NZD cost.
The majority of foreign currency payments greater than NZD 1 million (NZD equivalent) are hedge accounted.
The notional gross contract amounts of foreign exchange forward contracts outstanding at balance date, by maturity banding, are:
| 2013 | 2012 | |
|---|---|---|
| $M | $M | |
| Within one year | 68.9 | 171.8 |
| One to two years | 1.7 | 18.7 |
| Two to five years | - | - |
| Greater than five years | - | - |
| Total foreign exchange forward contracts | 70.6 | 190.5 |
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NZ Gazette 2013, No 155
✨ LLM interpretation of page content
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Transpower New Zealand Limited Statement of Accounting Policies
(continued from previous page)
🏭 Trade, Customs & IndustryFinancial Statement, Credit Spreads, Fair Value, Sensitivity Analysis, Currency Risk, Debt, Derivatives, Investments, Yield Curve, Operating Risks, Foreign Purchases, Hedge Accounting, Foreign Exchange Contracts