ST Engineering Annual Report 2020

NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2020 (CURRENCY – SINGAPORE DOLLARS UNLESS OTHERWISE STATED) C14 Financial risk management objectives and policies (continued) The Group has cash balances placed with reputable banks and financial institutions. The Group manages its interest rate risk on its interest income by placing the cash balances in varying maturities and interest rate terms with due consideration to operating cash flow requirements and optimising yield. The Group’s debts include bank loans, Medium Term Notes (MTN), commercial papers and lease liabilities (2019: bank loans, commercial papers and lease liabilities). The Group seeks to minimise its interest rate risk exposure through tapping different sources of funds to refinance the debt instruments and/or enter into interest rate swaps. An increase/decrease of 50 basis points in interest rate, with all other variables being held constant, would lead to a reduction/increase of the Group’s profit or loss by approximately $1.2 million (2019: $7.8 million). The Group’s policy is to maintain at least 50% of its borrowings at fixed rate, using floating-to-fixed interest rate swaps to achieve this when necessary. During 2020 and 2019, the Group’s borrowings at variable rate were mainly denominated in USD. Except for the short-term US commercial paper (USCP) below, other variable interest rates borrowings were not referenced to inter-bank offered rates (IBORs) that will be affected by the IBOR reforms. Included in the variable rate borrowings is a USCP of $396,230,000 (2019: $1,436,140,000) whose interest rate on each rollover correlates with 3-month LIBOR. To hedge the variability of the cash flows of the USCP, the Group has entered into a 5-year interest rate swap of notional amount of $191,719,000 as at 31 December 2020 (2019: $330,285,000) with key terms that match part of the outstanding USCP on which it pays a fixed rate and receives a variable rate. The Group’s borrowings and receivables are carried at amortised cost. The borrowings are periodically contractually repriced and to that extent are also exposed to the risk of future changes in market interest rates. Hedge ineffectiveness for interest rate swaps is assessed using the same principles as for hedges of foreign currency purchases. It may occur due to: • the credit value/debit value adjustment on the interest rate swaps which is not matched by the loan; • differences in critical terms between the interest rate swaps and loans; and • the effects of the forthcoming reforms to LIBOR, because these might take effect at a different time and have a different impact on the hedged item (the floating-rate debt) and the hedging instrument (the interest rate swap used to hedge the debt). No ineffectiveness has been recognised in relation to the interest rate swaps in finance income or finance costs in profit or loss for 2020 (2019: nil). Information relating to the Group’s interest rate risk exposure is also disclosed in the notes on the Group’s borrowings, investments and loans receivable, where applicable. / ST ENG I NEER I NG 204