NOTES TO THE FINANCIAL STATEMENTS – NOTE 36

36. Financial risk management
 

The group’s financial instruments consist mainly of deposits with banks, loans from banks, loan and trade receivables, interest rate swaps, payables and foreign currency investments. In respect of the above-mentioned financial instruments, book values approximate fair value. Exposure to interest rate, credit, liquidity, market, price and currency risks occur in the normal course of business.

Interest rate risk

The group is exposed to interest rate risk due to material interest-bearing borrowings. The risk is managed by maintaining an appropriate mix between fixed and floating rate borrowings and by the use of interest rate swaps.

Interest rate sensitivity analysis

The sensitivity analysis includes the exposure to interest rates for both derivatives and non-derivative instruments at the end of the financial year.

For floating rate liabilities it is assumed that the liability outstanding at the end of the year was outstanding for the whole year. A 150 basis point increase or decrease in interest rates was used in the analysis.

If interest rates had increased/decreased by 150 basis points and all other variables were held constant, the group’s profit for the year ended 30 June 2015 would increase/decrease by R5,6 million (based on year-end floating debt) and the company’s profit for the year ended 30 June 2015 would increase/decrease by R2,2 million (based on year-end floating debt).

The group’s sensitivity to interest rates has decreased during the current year due to an increase in the proportion of fixed debt to 95% of total debt (2014: 71%).

Fixed rate agreements and interest swaps

Refer to note 18 and 19 for further detail in respect of fixed rate agreements and interest rate swaps.

The group’s exposure to interest rate risk and interest rates on financial instruments at the reporting date was as follows:

Liquidity and interest rate risk

  Note   Weighted
average
effective
interest rate
%		   One year
or less
R000		   One to
five years
R000		   More than
five years
R000		   Total
R000		  
Group                        
Year ended 30 June 2015                        
Financial assets                        
Derivative instruments 19           53 132       53 132  
Loans receivable 10       53 757   2 258 125       2 311 882  
Receivables 11       87 152           87 152  
Cash and cash equivalents 12       83 841           83 841  
Total financial assets         224 750   2 311 257       2 536 007  
Financial liabilities                        
Borrowings 18   7,12   772 000   5 919 909       6 691 909  
Payables 21       377 917           377 917  
Derivative instruments 19       2 629   40 123       42 752  
Total financial liabilities         1 152 546   5 960 032       7 112 578  
Company                        
Year ended 30 June 2015                        
Financial assets                        
Derivative instruments 19           53 132   53 132   53 132  
Loans receivable 10       67 450       67 450   67 450  
Receivables 11       78 311       78 311   78 311  
Cash and cash equivalents 12       62 970       62 970   62 970  
Total financial assets         208 731   53 132   261 863   261 863  
Financial liabilities                        
Borrowings 18   8,43   1 533 128   3 726 838   5 259 966   5 259 966  
Payables 21       359 831       359 831   359 831  
Derivative instruments 19       2 629   21 691   24 320   24 320  
Total financial liabilities         1 895 588   3 748 529   5 644 117   5 644 117  

  Note   Weighted
average
effective
interest rate
%		   One year
or less
R000		   One to
five years
R000		   More than
five years
R000		   Total
R000		  
Group                        
Year ended 30 June 2014                        
Financial assets                        
Derivative instruments 19           32 978       32 978  
Loans receivable 10       47 486   812 459       859 945  
Receivables 11       103 686           103 686  
Cash and cash equivalents 12       77 353           77 353  
Total financial assets         228 525   845 437       1 073 962  
Financial liabilities                        
Debenture capital(1)     Variable           5 719 119   5 719 119  
Borrowings 18   7,50   2 013 031   5 185 822       7 198 853  
Payables 21       367 686           367 686  
Combined shareholders for distribution     Variable   585 877           585 877  
Derivative instruments 19           41 829       41 829  
Total financial liabilities         2 966 594   5 227 651   5 719 119   13 913 364  
Company                        
Year ended 30 June 2014                        
Financial assets                        
Derivative instruments 19           32 978       32 978  
Loans receivable 10       47 674           47 674  
Receivables 11       102 629           102 629  
Cash and cash equivalents 12       61 257           61 257  
Total financial assets         211 560   32 978       244 538  
Financial liabilities                        
Debenture capital(1)     Variable           5 730 187   5 730 187  
Borrowings 18   8,20   2 013 031   3 792 566       5 805 597  
Payables 21       335 626           335 626  
Combined shareholders for distribution     Variable   585 877           585 877  
Derivative instruments 19           39 811       39 811  
Total financial liabilities         2 934 534   3 832 377   5 730 187   12 497 098  
(1) Transferred to stated capital (converted to equity) in August 2014.

Interest rates are monitored and appropriate steps taken to ensure that Hyprop’s exposure to interest rate fluctuations is limited. Interest rates have been fixed for periods ranging from 2016 to 2024 with an average maturity of 5,2 years. The average maturity of the fixed interest rate agreements and interest rate swaps is disclosed in note 18 and 19. The average rate of interest at year-end (applicable to total debt) was 7,1% (2014: 7,5%). The primary reason for the reduction in the average interest rate for the year was due to an increase in the proportion that US Dollar funding comprises of total debt.

Credit risk

Credit risk arises from the risk that a counterparty may default or not meet its obligations timeously. Credit risk is limited to the carrying amount of financial assets at the reporting date.

Receivables

Trade receivables consist of a large, widespread tenant base. The financial position of tenants is monitored on an ongoing basis. An allowance is made for all specific doubtful debts at year-end. Management does not consider there to be any material credit risk exposure that is not already covered by a doubtful debt allowance. The carrying value of receivables is considered to be a reasonable approximation of fair value.

Cash and cash equivalents

It is group policy to deposit short-term cash investments with reputable financial institutions.

Liquidity risk

Liquidity risk is the risk that the group will be unable to meet its financial commitments. This risk is minimised by holding cash balances and by a floating loan facility. In addition, the company regularly monitors forecast cash flows and considers the matching of maturity profiles of financial assets and liabilities.

Foreign exchange risk

The group operates beyond South African borders and is exposed to foreign exchange risk arising from exposure to the US Dollar.

Foreign exchange risk arises from recognised assets and liabilities and net investments in foreign operations. Currently this exposure arises through Hyprop’s 37,5% interest in AttAfrica and its 50% interest in Manda Hill Mauritius, via its wholly owned subsidiary, Hyprop Mauritius. The group hedges the majority of interest rates in respect of US Dollar funding raised to finance investments in sub-Saharan Africa (excluding SA). US Dollar funding is currently 90% hedged. Income earned from foreign operations is currently not hedged.

Foreign currency exposure at the end of the year
  June 2015
R000		   June 2014
R000		  
Non-current assets        
Loan to AttAfrica and Manda Hill Mauritius USD183 926 879 (2014: USD76 803 544) 2 258 125   812 459  
Current assets        
Receivables USD2 948 (2014: USD2 384) 36   25  
Cash and cash equivalents USD754 (2014: USD1 160) 9   12  
Liabilities        
Interest-bearing debt USD178 628 099 (2014: USD74 680 258) 2 193 071   789 998  
Derivative instrument USD1 501 278 (2014: 190 837) 18 432   2 019  
Taxation USD87 777 (2014: nil) 1 078      
Payables USD687 232 (2014: USD99 388) 8 437   3 336  
Exchange rates used for conversion of foreign amounts were:        
USD 12,28   10,58  

If the R/USD exchange rate had decreased/increased by 1% for the year ended 30 June 2015 (2014: 1%), the group’s total consolidated profit for the year ended 30 June 2015 would have increased/decreased by R0,4 million (2014: R0,5 million).