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rate risk and price risk) and liquidity risk.
According to the annual report of the corporation for the year ended on 30th June 2011, credit risk for the company arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to customers, including trade debts and committed transactions. Out of the total financial assets, the financial assets of the company that are subject to credit risk amounted to Rs3,548.898 million (2010: Rs3,133.362 million), the report said. Moreover, a significant component of the receivable balances of the group relates to amounts due from the private sector organisations.
Foreign exchange risk
The group faces foreign currency risk on receivable, payable transactions at foreign ports and the derivative cross currency interest rate swap. Foreign currency risk is covered as a considered management decision, since the income from the derivative cross currency interest rate swap fluctuates widely due to change in exchange rate.
As of 30th June 2011, if the currency had weakened by 5 per cent against the US dollar with all other variables held constant, pre-tax profit for the year would have been Rs386.541 million (2010: Rs11.507 million) lower, mainly as a result of foreign exchange gains or losses on the translation of US dollar denominated assets and liabilities.
If at the same date the currency had strengthened by 5 per cent against US dollar with all other variables held constant, pre-tax profit for the year would have been Rs427.044 million (2010: Rs11.507 million) higher; mainly as a result of foreign exchange gains or losses on the translation of US dollar denominated assets and liabilities.
But, the affect of fluctuations in other foreign currency denominated assets or liabilities balances would not be material, therefore, not disclosed.
Cash flow and fair value interest rate risk
Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in the market interest rates. The group has a high exposure to interest rate risk due to the financing obtained during the year. In order to manage its exposure to such risks the management of the holding company has entered into a derivative cross currency interest rate swap under which the holding company receives KIBOR on the PKR notional in exchange for payment of LIBOR on the USD notional.
The group has interest bearing liabilities and has floating interest rates. On 30th June 2011, if interest rates on borrowings had been 250 basis points higher or lower with all other variables held constant, profit after taxation for the year would have been lower/higher by Rs21.981 million (2010: Nil).
Liquidity Risk
Liquidity risk is the risk that the group will encounter difficulties in raising funds to meet commitments associated with financial instruments. The group believes that it is not exposed to any significant level of liquidity risk. The management forecasts the liquidity of the group on the basis of expected cash flow considering the level of liquid assets necessary to meet such risk. This involves monitoring balance sheet liquidity ratios and maintaining debt financing plans.
The group is subject to external restrictions in respect of long term financing against which it needs to comply with certain covenants; debt equity ratio shall not exceed 60:40 and debt service ratio of 1.25 times. The group is in compliance with the requirements of such covenants and maintains a debt equity ratio of 30:70 and debt service coverage ratio of 3.4 times.
Long-term Financing
During the year, the Corporation has obtained financing facility of Rs10,300 million (June 30, 2010: nil). The financing was obtained in the form of a syndicated term finance loan of Rs9,000 million and the remaining amount of Rs1,300 million in the form of Term Finance Certificates (TFCs) with a face value of Rs5,000 each by way of private placement.
The corporation can draw down the amount till 1st February 2012. The financing carries mark-up of KIBOR+2.20 per cent. The loan along with the mark-up is repayable on quarterly basis and the last repayment date is 23rd November, 2018. The facility is secured by a first mortgage charge over certain vessels owned by its subsidiary companies, all present and future receivables of the corporation from three major customers and its investment properties.
As of 30th June 2011, the corporation has drawn Rs7,438.806 million (June 30, 2010: nil) and Rs1,074.494 million (June 30, 2010: nil) from syndicated term finance and TFCs’ respectively. The corporation has also paid loan arrangement fee amounting to Rs106.662 million out of which Rs88.160 million (June 30, 2010: nil) was included in the amortised cost of the long term financing whereas the unamortised portion amounting to Rs18.502 million (June 30, 2010: nil) has been included in deposits and short-term prepayments.
Source: Pakistan Today