6.3.29Financial Instruments − Fair Values and Risk Management

This note presents information about the Company’s exposure to risk resulting from its use of financial instruments, the Company’s objectives, policies and processes for measuring and managing risk, and the Company’s management of capital. Further qualitative disclosures are included throughout these consolidated financial statements.

Accounting classifications and fair values

The Company uses the following fair value hierarchy for financial instruments that are measured at fair value in the statement of financial position, which require disclosure of fair value measurements by level:

  • Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1)
  • Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2)
  • Inputs for the asset or liability that are not based on observable market data (that is unobservable inputs) (Level 3)

The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value.

Accounting classification and fair values as at 31 December 2015

Carrying amount

Notes

Fair Value through profit or loss

Fair value - hedging instruments

Held-to-maturity

Available for sale

Loans and receivables

IAS 17 Leases

Financial liabilities at amortised cost

Total

Financial assets measured at fair value

Interest rate swaps

6.3.20

-

0

-

-

-

-

-

0

Forward currency contracts

6.3.20

18

2

-

-

-

-

-

20

Commodity contracts

6.3.20

-

-

-

-

-

-

-

-

Corporate securities

6.3.15

-

-

-

2

-

-

-

2

Total

18

3

-

2

-

-

-

23

Financial assets not measured at fair value

Corporate securities

6.3.15

-

-

28

-

-

-

-

28

Trade and other receivables

6.3.18

-

-

-

-

640

-

-

640

Finance leases receivables

6.3.15/6.3.18

-

-

-

-

-

3,184

-

3,184

Loans to joint ventures and associates

6.3.15/6.3.18

-

-

-

-

299

-

-

299

Total

-

-

28

-

938

3,184

-

4,151

Financial liabilities measured at fair value

Interest rate swaps

6.3.20

-

205

-

-

-

-

-

205

Forward currency contracts

6.3.20

41

86

-

-

-

-

-

127

Commodity contracts

6.3.20

-

-

-

-

-

-

-

-

Total

41

291

-

-

-

-

-

332

Financial liabilities not measured at fair value

US$ project finance facilities drawn

6.3.24

-

-

-

-

-

-

2,782

2,782

US$ guaranteed project finance facilities drawn

6.3.24

-

-

-

-

-

-

2,515

2,515

Revolving credit facility/Bilateral credit facilities

6.3.24

-

-

-

-

-

-

(4)

(4)

Bank overdrafts

6.3.21

-

-

-

-

-

-

-

-

Other debt

6.3.24

-

-

-

-

-

-

429

429

Trade and other payables/Other non-current liabilities

6.3.27

-

-

-

-

-

-

992

992

Total

-

-

-

-

-

-

6,714

6,714

Fair value levels 2015

Fair value

Notes

Level 1

Level 2

Level 3

Total

Financial assets measured at fair value

Interest rate swaps

6.3.20

-

0

-

0

Forward currency contracts

6.3.20

-

20

-

20

Commodity contracts

6.3.20

-

-

-

-

Corporate securities

6.3.15

-

2

-

2

Total

-

23

-

23

Financial assets not measured at fair value

Corporate securities

6.3.15

25

2

-

27

Trade and other receivables

6.3.18

-

-

-

-

Finance leases receivables

6.3.15/6.3.18

-

-

3,134

3,134

Loans to joint ventures and associates

6.3.15/6.3.18

-

-

296

296

Total

25

2

3,430

3,457

Financial liabilities measured at fair value

Interest rate swaps

6.3.20

-

205

-

205

Forward currency contracts

6.3.20

-

127

-

127

Commodity contracts

6.3.20

-

-

-

-

Total

-

332

-

332

Financial liabilities not measured at fair value

US$ project finance facilities drawn

6.3.24

-

2,700

-

2,700

US$ guaranteed project finance facilities drawn

6.3.24

-

2,515

-

2,515

Revolving credit facility/Bilateral credit facilities

6.3.24

-

(4)

-

(4)

Bank overdrafts

6.3.19

-

-

-

-

Other debt

6.3.24

-

-

427

427

Trade and other payables/Other non-current liabilities

6.3.27

-

-

-

-

Total

-

5,211

427

5,638

Additional information

  • In the above table, the Company has disclosed the fair value of each class of financial assets and financial liabilities in a way that permits the information to be compared with the carrying amounts
  • Classes of financial instruments that are not used are not disclosed
  • The Company has not disclosed the fair values for financial instruments such as short term trade receivables and payables, because their carrying amounts are a reasonable approximation of fair values as the impact of discounting is insignificant
  • No instruments were transferred between Level 1 and Level 2
  • None of the instruments of the Level 3 hierarchy are carried at fair value in the statement of financial position
  • No financial instruments were subject to offsetting as of 31 December 2015 and 31 December 2014. Financial Derivatives amounting to a fair value of US$ 14.8 million (2014: US$ 28 million) were subject to enforceable master netting arrangements or similar arrangements but were not offset as the IAS 32 ‘Financial Instruments – Presentation’ criteria were not met. The impact of offsetting would result in a reduction of both assets and liabilities by US$ 0.0 million (2014: US$ 0.1 million)

Accounting classification and fair values as at 31 December 2014

Carrying amount

Notes

Fair Value through profit or loss

Fair value - hedging instruments

Held-to-maturity

Loans and receivables

IAS 17 Leases

Financial liabilities at amortised cost

Total

Financial assets measured at fair value

Interest rate swaps

6.3.20

-

2

-

-

-

-

2

Forward currency contracts

6.3.20

23

1

-

-

-

-

24

Commodity contracts

6.3.20

-

-

-

-

-

-

-

Total

23

3

-

-

-

-

26

Financial assets not measured at fair value

Corporate securities

-

-

29

-

-

-

29

Trade and other receivables

6.3.18

-

-

-

857

-

-

857

Finance leases receivables

6.3.14

-

-

-

-

3,379

-

3,379

Loans to joint ventures and associates

6.3.15/6.3.18

-

-

-

441

-

-

441

Total

-

-

29

1,298

3,379

-

4,706

Financial liabilities measured at fair value

Interest rate swaps

6.3.20

-

186

-

-

-

-

186

Forward currency contracts

6.3.20

23

125

-

-

-

-

148

Commodity contracts

6.3.20

-

3

-

-

-

-

3

Total

23

314

-

-

-

-

337

Financial liabilities not measured at fair value

US$ project finance facilities drawn

6.3.24

-

-

-

-

-

3,268

3,268

US$ guaranteed project finance facilities drawn

6.3.24

-

-

-

-

-

963

963

Revolving credit facility/Bilateral credit facilities

6.3.24

-

-

-

-

-

454

454

Bank overdrafts

6.3.21

-

-

-

-

-

23

23

Other debt

6.3.24

-

-

-

-

-

543

543

Trade and other payables/Other non-current liabilities

6.3.27

-

-

-

-

-

1,791

1,791

Total

-

-

-

-

-

7,042

7,042

Fair value levels 2014

Fair value

Notes

Level 1

Level 2

Level 3

Total

Financial assets measured at fair value

Interest rate swaps

6.3.20

-

2

-

2

Forward currency contracts

6.3.20

-

24

-

24

Commodity contracts

6.3.20

-

-

-

-

Total

-

26

-

26

Financial assets not measured at fair value

Corporate securities

24

5

-

29

Trade and other receivables

6.3.18

-

-

-

-

Finance leases receivables

6.3.14

-

-

3,645

3,645

Loans to joint ventures and associates

6.3.15/6.3.18

-

-

449

449

Total

24

5

4,094

4,123

Financial liabilities measured at fair value

Interest rate swaps

6.3.20

-

186

-

186

Forward currency contracts

6.3.20

-

148

-

148

Commodity contracts

6.3.20

-

3

-

3

Total

-

337

-

337

Financial liabilities not measured at fair value

US$ project finance facilities drawn

6.3.24

-

3,257

-

3,257

US$ guaranteed project finance facilities drawn

6.3.24

-

963

-

963

Revolving credit facility/Bilateral credit facilities

6.3.24

-

454

-

454

Bank overdrafts

6.3.21

-

-

-

-

Other debt

6.3.24

-

-

553

553

Trade and other payables/Other non-current liabilities

6.3.27

-

-

-

-

Total

-

4,674

553

5,227

Measurement of fair values

The following table shows the valuation techniques used in measuring Level 2 and Level 3 fair values, as well as the significant unobservable inputs used.

Level 2 and level 3 instruments

Level 3 instruments

Type

Valuation technique

Significant unobservable inputs

Inter-relationship between significant unobservable inputs and fair value measurement

Financial instrument measured at fair value

Interest rate swaps

Income approach −
Present value technique

Not applicable

Not applicable

Forward currency contracts

Income approach −
Present value technique

Not applicable

Not applicable

Commodity contracts

Income approach −
Present value technique

Not applicable

Not applicable

Financial instrument not measured at fair value

Loans to joint ventures and associates

Income approach −
Present value technique

  • Forecast revenues
  • Risk-adjusted discount rate (4%-7%)

The estimated fair value would increase (decrease) if :

  • the revenue was higher (lower)
  • the risk-adjusted discount rate was lower (higher)

Finance lease receivables

Income approach −
Present value technique

  • Forecast revenues
  • Risk-adjusted discount rate (4%-8%)

The estimated fair value would increase (decrease) if :

  • the revenue was higher (lower)
  • the risk-adjusted discount rate was lower (higher)

Loans and borrowings

Income approach −
Present value technique

Not applicable

Not applicable

Other long term debt

Income approach −
Present value technique

  • Forecast revenues
  • Risk-adjusted discount rate (8%-12%)

The estimated fair value would increase (decrease) if :

  • the revenue was higher (lower)
  • the risk-adjusted discount rate was lower (higher)

Corporate debt securities

Market approach

Not applicable

Not applicable

Derivative Assets and Liabilities designated as Cash Flow Hedges

The following table indicates the period in which the cash flows associated with the cash flow hedges are expected to occur and the carrying amounts of the related hedging instruments. The amounts disclosed in the table are the contractual undiscounted cash flows. The future interest cash flows for interest rate swaps are estimated using the forward rates as at the reporting date.

Cash flows

Carrying amount

Less than
1 year

Between
1 and 5 years

More than
5 years

Total

31 December 2015

Interest rate swaps

(205)

(94)

(184)

(27)

(306)

Forward currency contracts

(84)

(84)

-

-

(84)

Commodity contracts

-

-

-

-

-

31 December 2014

Interest rate swaps

(184)

(52)

(181)

(59)

(292)

Forward currency contracts

(124)

(85)

(31)

-

(116)

Commodity contracts

(3)

(3)

-

-

(3)

The following table indicates the period in which the cash flows hedges are expected to impact profit or loss and the carrying amounts of the related hedging instruments.

Expected profit or loss impact

Carrying amount

Less than
1 year

Between
1 and 5 years

More than
5 years

Total

31 December 2015

Interest rate swaps

(205)

(94)

(184)

(27)

(306)

Forward currency contracts

(84)

(84)

-

-

(84)

Commodity contracts

-

-

-

-

-

31 December 2014

Interest rate swaps

(184)

(52)

(181)

(59)

(292)

Forward currency contracts

(124)

(85)

(31)

-

(116)

Commodity contracts

(3)

(3)

-

-

(3)

Interest rate swaps

Gains and losses recognized in the hedging reserve in equity on interest rate swap contracts will be continuously released to the income statement until the final repayment of the hedged items (see ‘6.3.23 Equity Attributable to Shareholders ’).

Forward currency contracts

Gains and losses recognized in the hedging reserve on forward currency contracts are recognized in the income statement in the period or periods during which the hedged transaction affects the income statement. This is mainly within twelve months from the statement of financial position date unless the gain or loss is included in the initial amount recognized in the carrying amount of fixed assets, in which case recognition is over the lifetime of the asset, or the gain or loss is included in the initial amount recognized in the carrying amount of the cost incurred on construction contracts in which case recognition is based on the ‘percentage-of-completion method’.

Financial Risk Management

The Company’s activities expose it to a variety of financial risks, market risks (including currency risk, interest rate risk and commodity risk), credit risk and liquidity risk. The Company’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company’s financial performance. The Company uses derivative financial instruments to hedge certain risk exposures. The Company buys and sells derivatives in the ordinary course of business, and also incurs financial liabilities, in order to manage market risks. All such transactions are carried out within the guidelines set in the Group Policy. Generally the Company seeks to apply hedge accounting in order to manage volatility in the Income Statement and Statement of Comprehensive Income. The purpose is to manage the interest rate and currency risk arising from the Company’s operations and its sources of finance. Derivatives are only used to hedge closely correlated underlying business transactions.

The Company’s principal financial instruments, other than derivatives, comprise trade debtors and creditors, bank loans and overdrafts, cash and cash equivalents (including short term deposits) and financial guarantees. The main purpose of these financial instruments is to finance the Company’s operations and/or result directly from the operations.

Financial risk management is carried out by a central treasury department under policies approved by the Management Board. Treasury identifies, evaluates and hedges financial risks in close co-operation with the subsidiaries and the Chief Financial Officer (CFO) during the quarterly Asset-Liability Committee. The Management Board provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and investment of excess liquidity. It is, and has been throughout the year under review, the Company’s policy that no speculation in financial instruments shall be undertaken. The main risks arising from the Company’s financial instruments are market risk, liquidity risk and credit risk.

Market risk

Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates, will affect the Company’s income or the value of its holding of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return on risk.

Foreign exchange risk

The Company operates internationally and is exposed to foreign exchange risk arising from transactional currency exposures, primarily with respect to the euro, Singapore dollar, and Brazilian real. The exposure arises from sales or purchases in currencies other than the Company’s functional currency. The Company uses forward currency contracts to eliminate the currency exposure once the Company has entered into a firm commitment of a project contract.

The main Company’s exposure to foreign currency risk is as follows based on notional amounts:

Foreign exchange risk (summary)

31 December 2015

31 December 2014

in millions of local currency

EUR

SGD

BRL

EUR

SGD

BRL

Fixed assets

55

-

38

59

-

36

Current assets

62

1

37

111

1

90

Long term liabilities

(13)

-

-

(15)

-

-

Current liabilities

(88)

(12)

(70)

(171)

(7)

8

Gross balance sheet exposure

17

(11)

4

(16)

(7)

134

Estimated forecast sales

-

-

-

-

-

-

Estimated forecast purchases

(529)

(65)

(429)

(708)

(293)

(688)

Gross exposure

(513)

(76)

(425)

(724)

(300)

(554)

Forward exchange contracts

553

75

292

819

299

473

Net exposure

40

0

(132)

95

(1)

(81)

Estimated forecast purchases have significantly decreased in 2015 following the construction progress on three FPSO projects (Turritella, Cidade de Marica and Cidade de Saquarema).

The estimated forecast purchases relate to project expenditures for up to three years and overhead expenses.
The main currency exposures of overhead expenses are 100% hedged for the coming year, 66% hedged for the year thereafter, and 33% for the subsequent year.

Foreign exchange risk (exchange rates applied)

2015

2014

2015

2014

Average rate

Closing rate

EUR 1

1.1095

1.3285

1.0887

1.2141

SGD 1

0.7275

0.7895

0.7062

0.7561

BRL 1

0.3045

0.4262

0.2525

0.3770

The sensitivity on equity and the income statement resulting from a change of ten percent of the US dollar’s value against the following currencies at 31 December would have increased (decreased) profit or loss and equity by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for 2014.

Foreign exchange risk (sensitivity)

Profit or loss

Equity

10 percent increase

10 percent decrease

10 percent increase

10 percent decrease

31 December 2015

EUR

0

0

(62)

62

SGD

0

0

(5)

5

BRL

0

0

(8)

8

31 December 2014

EUR

-

-

(97)

97

SGD

-

-

(22)

22

BRL

-

-

(23)

23

As set out above, by managing foreign currency risk the Company aims to reduce the impact of short term market price fluctuations on the Company’s earnings. Over the long term however, permanent changes in foreign currency rates would have an impact on consolidated earnings.

Interest rate risk

The Company’s exposure to risk from changes in market interest rates relates primarily to the Company’s long term debt obligations with a floating interest rate. In respect of controlling interest rate risk, the floating interest rates of long term loans are hedged by fixed rate swaps for the entire maturity period. The revolving credit facility is intended for fluctuating needs of construction financing of facilities and bears interest at floating rates, which is also swapped for fixed rates when exposure is significant.

At the reporting date, the interest rate profile of the Company’s interest-bearing financial instruments (exluding transaction costs) was:

Interest rate risk (summary)

2015

2014

Fixed rate instruments

Financial assets

3,293

3,482

Financial liabilities

(929)

(1,018)

Total

2,364

2,464

Variable rate instruments

Financial assets

220

337

Financial liabilities

(4,952)

(4,274)

Financial liabilities (future)

(366)

(2,010)

Total

(5,097)

(5,947)

Interest rate risk (exposure)

2015

2014

Variable rate instruments

(5,097)

(5,947)

Less: IRS contracts

5,186

5,404

Exposure

89

(543)

At 31 December 2015, it is estimated that a general increase of 100 basis points in interest rates would increase the Company’s profit before tax for the year by approximately US$ 1 million (2014: increase of US$ 3 million) mainly related to un-hedged financial assets. 92.8% (2014: 92.5%) of the floating operating debt is hedged by floating-to-fix interest rate swaps.

The sensitivity on equity and the income statement resulting from a change of 100 basis points in interest rates at the reporting date would have increased (decreased) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis as for 2014.

Interest rate risk (sensitivity)

Profit or loss

Equity

100 bp increase

100 bp decrease

100 bp increase

100 bp decrease

31 December 2015

Variable rate instruments

1

0

-

-

Interest rate swap

0

0

320

(345)

Sensitivity (net)

1

(1)

320

(345)

31 December 2014

Variable rate instruments

2

-

-

-

Interest rate swap

1

(1)

255

(279)

Sensitivity (net)

3

(1)

255

(279)

As set out above, the Company aims to reduce the impact of short term market price fluctuations on the Company’s earnings. Over the long term however, permanent changes in interest rates would have an impact on consolidated earnings.

Credit risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company’s other financial assets, trade and other receivables (including committed transactions), derivative financial instruments and cash and cash equivalents.

Credit risk

2015

2014

Rating

Assets

Liabilities

Assets

Liabilities

AAA

-

-

-

-

AA+

-

-

-

-

AA

1

40

-

-

AA-

-

6

-

8

A+

4

133

10

121

A

12

123

12

162

A-

-

15

3

37

BBB+

3

14

2

4

BBB

-

-

-

-

BBB-

-

-

-

1

Non-investment grade

0

0

-

4

Derivative financial instruments

21

332

26

337

AAA

20

-

-

-

AA+

0

-

-

-

AA

46

-

-

-

AA-

22

-

6

-

A+

109

-

50

-

A

259

-

135

-

A-

0

-

238

23

BBB+

32

-

34

-

BBB

-

-

-

-

BBB-

0

-

10

-

Non-investment grade

26

-

2

-

Cash and cash equivalents and bank overdrafts

515

-

475

23

The Company maintains its policy on cash investment and limits per individual counterparty are set to: A- and A rating US$ 25 million, A+ rating US$ 50 million, AA- and AA rating US$ 80 million and AA+ and above rating US$ 100 million. Cash held in banks rated below A- is mainly related to the Company’s activities in Angola and cash held in the Royal Bank of Scotland (US$ 32 million).

For trade debtors the credit quality of each customer is assessed, taking into account its financial position, past experience and other factors. Bank or parent company guarantees are negotiated with customers. Individual risk limits are set based on internal or external ratings in accordance with limits set by the Management Board. At the statement of financial position date there is no customer that has an outstanding balance with a percentage over 10% of the total of trade and other receivables. Reference is made to 6.3.18 Trade and Other Receivables for information on the distribution of the receivables by country and an analysis of the ageing of the receivables. Furthermore, limited recourse project financing removes a significant portion of the risk on long term leases.

For other financial assets, the credit quality of each counterpart is assessed taking into account its credit agency rating.

Regarding loans to joint ventures and associates, the maximum exposure to credit risk is the carrying amount of these instruments. As the counterparties of these instruments are Joint Ventures, SBM Offshore has visibility over the expected cash flows and can monitor and manage credit risk that mainly arises from the Joint Venture’s final client.

Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and abnormal conditions, without incurring unacceptable losses or risking damage to the Company’s reputation.

Liquidity is monitored using rolling forecasts of the Company’s liquidity reserves on the basis of expected cash flows. Flexibility is secured by maintaining availability under committed credit lines.

The table below analyses the Company’s non-derivative financial liabilities, derivative financial liabilities and derivative financial assets into relevant maturity groupings based on the remaining period at the statement of financial position date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. The future interest cash flows for borrowings and derivative financial instruments are based on the LIBOR rates as at the reporting date.

Liquidity risk 2015

Notes

Less than 1 year

Between 1 and 5 years

Over 5 years

31 December 2015

Borrowings

928

2,517

3,316

Derivative financial liabilities

214

421

313

Derivative financial assets

0

0

-

Trade and other payables

6.3.27

992

0

-

Bank overdraft

6.3.21

-

-

-

Total

2,134

2,938

3,629

Liquidity risk 2014

Notes

Less than 1 year

Between 1 and 5 years

Over 5 years

31 December 2014

Borrowings

1,016

2,439

2,574

Derivative financial liabilities

182

393

284

Derivative financial assets

(23)

41

33

Trade and other payables

6.3.27

1,721

0

-

Bank overdraft

6.3.21

23

-

-

Total

2,919

2,873

2,891

Capital risk management

The Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern in order to provide returns for shareholders, benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

Consistent with others in the industry, the Company monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including the short term part of the long term debt and bank overdrafts as shown in the consolidated statement of financial position) less cash and cash equivalents. Total capital is calculated as equity, as shown in the consolidated statement of financial position, plus net debt.

The Company’s strategy, which has not changed from 2014, is to target a gearing ratio between 50% and 60%. This target is subject to maintaining headroom of 20% of all banking covenants. The gearing ratios at 31 December 2015 and 2014 were as follows:

Capital risk management

2015

2014

Total borrowings

5,722

5,227

Less: net cash and cash equivalents

(515)

(452)

Net debt

5,208

4,775

Total equity

3,465

3,149

Total capital

8,672

7,924

Gearing ratio

60.0%

60.3%

Other risks

In respect of controlling political risk, the Company has a policy of thoroughly reviewing risks associated with contracts, whether turnkey or long term leases. Where political risk cover is deemed necessary and available in the market, insurance is obtained.