Risk Management Policy
Financing for Swire Pacific subsidiaries
in Hong Kong is provided primarily by Swire Pacific, which raises funds
both directly and through wholly-owned finance subsidiaries. Certain working
capital lines and overdraft facilities are arranged by individual subsidiaries.
All areas of financial risk management activity are subject to policies,
guidelines, exposure limits, and systematic authorisation and reporting.
The group's listed associated companies, Cathay Pacific and HAECO, arrange
their financial affairs on a stand-alone basis. Their financing activities
are undertaken in a manner consistent with the overall financial policies
of the group.
USE OF DERIVATIVES
In the normal course of business, Swire
Pacific and Cathay Pacific use interest rate and currency swaps in connection
with their borrowings. Such derivative transactions are entered into in
order to manage exposure to fluctuations in foreign currency exchange
rates and interest rates. In addition, Cathay Pacific is a party to forward
contracts and options for the purchase of aviation fuel. It is the policy
of the Swire Pacific group not to enter into derivative transactions for
speculative purposes. The implementation of the hedging policy is only
undertaken following approval from the Board.
Derivatives involve, to varying degrees, credit and market risk. With
regard to credit risk, the group would be exposed to loss in the event
of non-performance by a counterparty. The group controls credit risk through
approved counterparty limits and monitoring procedures.
Market risk is the possibility that a movement in interest rates or currency
rates will cause the value of a derivative to fluctuate or change the
cost of settling the underlying obligations. Derivatives are used solely
for management of an underlying risk and the group is not exposed to market
risk since gains and losses on the derivatives are offset by losses and
gains on the assets, liabilities or transactions being hedged. The group
is not required by its counterparties to provide collateral or any other
form of security against any change in the market value of a derivative.
of Currency Exposure
Exposure to movements in exchange rates on individual transactions
in the Swire Pacific group is minimised using forward foreign exchange
contracts where active markets for the relevant currencies exist. With
the exception of the Perpetual Capital Securities, which have no scheduled
maturity, all significant foreign currency borrowings are covered by appropriate
Translation exposure arising on consolidation of the group's overseas
net assets is reduced, where practicable, by broadly matching assets with
borrowings in the same currency. Substantial proportions of the revenues,
costs, assets and liabilities of Swire Pacific and its subsidiary companies
are denominated in Hong Kong dollars.
The long-term financial obligations of Cathay Pacific have been arranged
primarily in currencies in which it has substantial positive operational
cash flows, thus establishing a natural currency hedge. The policy adopted
requires that anticipated surplus foreign currency earnings should be
at least sufficient to meet the foreign currency interest and principal
repayment commitments in any year.
Resources & Liquidity
Swire Pacific's total shareholders' funds have increased to HK$76,064
million at the end of 2000 compared with HK$68,509 million at the end
of 1999, mainly due to the upward revaluation of the group's investment
property portfolio and retained earnings.
At 31st December 2000, the Swire Pacific group held cash deposits of HK$404
million whilst bank loans and other borrowings due within one year amounted
to HK$2,142 million.
An analysis of the group's net borrowings by currency at 31st December
2000, including US$600 million (HK$4,642 million) of Perpetual Capital
Securities, is shown below:
At 31st December 2000, committed loan facilities and
other financing in place amounted to HK$18,356 million, of which 13% remained
undrawn. In addition, there were uncommitted facilities undrawn at the
year end amounting to HK$3,512 million. Sources of funds at the end of
It is group policy to secure adequate funding so as to match cash flows
associated with both current and planned investments. The maturity profile
of the group's gross borrowings at the end of each of the last five years
is set out below:
In addition to raising funds on a fixed rate basis, the group uses interest
rate swaps and other instruments where appropriate in the management of
its interest rate profile. At 31st December 2000, 45.8% of the group's
gross borrowings were on a floating rate basis and 54.2% were on a fixed
Cover and Gearing
The following graphs illustrate interest cover, cash interest cover and
gearing ratios for each of the last five years. Interest cover for the
year ended 31st December 2000 was 8.90 times while cash interest cover,
calculated by reference to total interest charges including those capitalised,
was 2.87 times. The gearing ratio was 0.21 at the end of 2000.
Capital expenditure incurred by the group in 2000 was HK$6,595 million.
The graph below illustrates capital expenditure by division over the last
The major outgoings during 2000 in the Property Division related to expenditure
on Cambridge House, the Cityplaza renovation and the provision in respect
of the Taikoo Shing arbitration. Expenditure in the Beverages Division
was mainly on property, production and distribution equipment, including
the acquisition, during the year, of fixed assets relating to the Ogden
franchise. Within the Marine Services Division, captial expenditure related
principally to instalment payments on six new offshore support vessels
for delivery from 2001 to 2003.