Financial Risk Management and Sensitivities
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The global market is Odfjell’s arena. We are therefore exposed to an infinite number of risk factors. Our financial strategy is to be sufficiently robust to withstand prolonged adverse conditions in significant risk factors, such as long-term down-cycles in the markets where we operate or unfavourable conditions in financial markets. Odfjell has an active approach as to manage risk in the financial markets. This is done through long-term funding from diversified sources, maintaining high liquidity or loan reserves, and through a systematic monitoring and management of risks related to currency, interest rates and bunkers. Odfjell’s net result and cash flow are influenced by our success at managing these risk factors. EARNINGSEarnings within the chemical tanker markets are less volatile than in many other shipping segments as we operate in a niche-market with specialized tonnage. The diversity of trade lanes and the products we transport provide a partial natural hedging against the negative effects of a general slowdown in demand. Our time-charter earnings are nonetheless influenced by external factors like world economic growth, the general ship-freight market, bunker prices and factors specifically related to the chemical tanker parcel trade, such as cargo type and cargo volume, trading pattern required by our customers, contract and spot rates and our operational efficiency. Time is of the essence; an optimal utilization of the fleet and an expedient composition of cargoes, with minimal time in port, is of vital importance so as to maximize time-charter earnings. The single largest monetary cost component affecting the time-charter earnings is bunkers. In 2008 it comprised about 60% of voyage cost. Sensitivity analysis show that a change in time-charter earnings of USD 1 000 per day for our parcel tankers (a roughly 4% change in freight rates) will impact the pre-tax net result by approximately USD 24 million. Currently we are not engaged in the derivative market as to Forward Freight Agreements. The tank terminal activities have historically shown more stable earnings than our shipping activities. About 35% of the 2008 operating result came from tank terminals. A substantial part of the tank terminal costs are fixed costs and the main drivers for earnings within a tank terminal are the occupancy rate, the volume of cargoes handled through and by the terminal, and operational efficiency. INTEREST RATESAll interest-bearing debt, except the debt of our tank terminals outside the US, is denominated in USD. Bonds issued in NOK and SGD are swapped to floating USD. At the end of 2008 about 50% of our debt was floating, based on USD LIBOR rates. The balance of the debt is fixed either through fixed rate loans or through long-term interest rate swaps. In order to reduce the volatility in net result and cash flow related to changes in short term interest rates, fixed time periods on floating rate debt and liquidity are managed to be concurrent. Our interest-bearing debt as per 31 December 2008 was USD 1.5 billion, while liquid assets were USD 193 million. CURRENCYThe Group’s revenues are primarily in USD; only tank terminals outside the US receive revenues in non-USD currency. Our currency exposure related to the net result and cash flow arises from voyage related expenses, ship operating expenses and general and administrative expenses denominated in non-USD Our currency hedging as per 31 December 2008, whereby we have sold USD and purchased NOK and EUR, covers about 80% of the 2009 exposure relating to voyage, docking, operating and admin expenses. For 2010 we have hedged 43% of this exposure. The average exchange rates for open hedging positions as of FINANCING AND LIQUIDITYOdfjell has a stable debt structure established with major international shipping banks, with which we enjoy long-standing relationships. We have a diversified debt portfolio and it is a combination of secured loans, unsecured loans, finance leases and bonds. The average maturity of the Group’s interest-bearing debt is about 6.1 years. Odfjell’s strategy is to maintain a high level of readily available liquidity. The liquidity is invested in bank deposits and high-grade certificates and bonds with floating interest rate. |
The Odfjell Group operates within a number of jurisdictions and tax systems. The shipping activities are operated in several countries and under different tax schemes, including the Norwegian tonnage tax system, the Approved International Shipping system in Singapore, and the tonnage tax systems in the UK and Germany. In addition we operate under local tax systems in Chile, Brazil and China. Our tank terminal activities are generally subject to the ordinary corporate tax rates within the country in which the activity is located. The variation in tax systems and rates may cause tax costs to vary significantly depending on the country in which profits are accumulated and taxed. The tax liability of NOK 518 million as per 31 December 2008 arising from the changes to the Norwegian tonnage tax system is payable over ten years from 2007, is mostly unhedged and will therefore increase the volatility of currency gains/losses. A 10% change in the USD/NOK exchange rate will impact unrealized gains/losses by about USD seven million.