MISC Annual Report 2018

NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS HIGHLIGHTS OF THE YEAR OUR BUSINESS OUR LEADERSHIP OUR PERFORMANCE OUR COMMITMENT TO SUSTAINABILITY OUR GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 50 TH ANNUAL GENERAL MEETING 331 MISC BERHAD ANNUAL REPORT 2018 330 38. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The Group is exposed to various risks that are related to its core business of shipowning, ship operating, other shipping related activities and services, owning and operating of offshore facilities and marine repair, marine conversion and engineering and construction works. These risks arise in the normal course of the Group’s business. The Group's Financial Risk Management Framework and Guidelines set the foundation for the establishment of effective risk management practices across the Group. The Group's Financial Risk Management Policy seeks to ensure that adequate financial resources are available for the development of the Group's businesses whilst managing its interest rate risk (both fair value and cash flow), foreign currency risk, liquidity risk, credit risk and equity price risk. The Board of Directors reviews and agrees policies for managing each of these risks as summarised below. It is, and has been throughout the period under review, the Group's policy that no speculative trading in derivative financial instruments shall be undertaken. The following sections provide details regarding the Group and the Corporation's exposure to the above-mentioned financial risks and the objectives, policies and processes in place to manage these risks. (a) Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of the Group’s financial instruments will fluctuate because of changes in market interest rates. As the Group has no significant long term interest-bearing financial assets, the Group's income and operating cash flows are substantially independent of changes in market interest rates. The Group's interest-bearing financial assets are mainly short term in nature and have been placed mostly in time deposits and overnight placements. The Group's interest rate risk arises primarily from interest- bearing loans and borrowings. Borrowings at floating rates expose the Group to cash flow interest rate risk. The Group's interest rate risks arise from the volatility of the benchmark interest rates in United States Dollar ("USD"), which is the Group's main borrowing currency. The Group manages its interest rate exposure by maintaining a mix of fixed and floating rate borrowings. As at 31 December 2018, 14.3% (2017: 18.3%) and 6.3% (2017: 9.8%) of the Group's and the Corporation's total borrowings were fixed rate in nature. To manage this mix in a cost-efficient manner, the Group enters into interest rate swaps in which the Group agrees to exchange at specified intervals, the difference between fixed and floating rate interest amounts calculated by reference to an agreed upon notional principal amount. As at reporting date, the total notional principal amount of interest rate swaps of the Group is RM1,943,878,000 (2017: RM2,145,433,000). The fixed interest rates relating to interest rate swaps at the reporting date ranges from 1.90% - 3.19% (2017: 1.31% - 2.29%) per annum. The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Group and the Corporation's profit before taxation and equity via floating rate borrowings and interest rate swaps respectively. 38. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONT'D.) (a) Interest rate risk (cont'd.) Increase/(Decrease) in LIBOR basis points Effect on profit before taxation (Decrease)/Increase RM'000 Effect on other comprehensive income Increase/(Decrease) RM'000 As at 31 December 2018 Group USD - 3 Months LIBOR +50 (54,435) 2,713 USD - 3 Months LIBOR -50 54,435 (2,713) Corporation USD - 3 Months LIBOR +50 (25,006) - USD - 3 Months LIBOR -50 25,006 - As at 31 December 2017 Group USD - 3 Months LIBOR +50 (48,907) 2,316  USD - 3 Months LIBOR -50 48,907  (2,316) Corporation USD - 3 Months LIBOR +50 (34,530) -  USD - 3 Months LIBOR -50 34,530  -