331 ANNUAL REPORT 2022 ACCOUNTABILITY NOTES TO THE FINANCIAL STATEMENTS (CONT’D) For the financial year ended 31 January 2022 41. Financial risk management objectives and policies The Group’s principal financial liabilities, other than derivatives and put option liability, comprise loans and borrowings, lease liabilities, trade and other payables, and financial guarantee contracts. The main purpose of these financial liabilities is to finance the Group’s operations and to provide guarantees to support its operations. The Group’s principal financial assets include finance lease receivables, trade and other receivables, cash and short-term deposits and contract assets that are derived directly from its operations. The Group is exposed to market risk, credit risk and liquidity risk. The Group’s senior management oversees the management of these risks. The Group’s senior management is supported by the corporate finance team that advises on financial risks and the appropriate financial risk governance framework for the Group. The corporate finance team assists Group’s senior management to ensure that the Group’s financial risk activities are governed by appropriate policies and procedures and that financial risks are identified, measured and managed in accordance with the Group’s policies and risk objectives. It is the Group’s policy that no trading in derivatives for speculative purposes may be undertaken. The Board of Directors reviews and agrees policies for managing each of these risks, which are summarised below. (a) Market risk Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises two types of risk: interest rate risk and foreign currency risk. Financial instruments affected by market risk include loans and borrowings, short-term deposits and derivatives. (i) Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s loans and borrowings with floating interest rates. The Group manages its interest rate risk by having a balanced portfolio of fixed and floating rate loans and borrowings. The Group enters into interest rate swaps, in which it agrees to exchange, at specified intervals, the difference between fixed and floating interest rate amounts calculated by reference to an agreed-upon notional amount. For the financial years ended 31 January 2022 and 2021, the Group’s borrowings at floating rates were primarily denominated in USD. Except for the USD LIBOR floating rate debt as set out in Note 32, the Group is not exposed to interbank offered rates (IBORs) that will be affected by the IBOR reforms. Included in the variable rate borrowings are 8 to 12 years (2021: 8 to 12 years) floating rate debt of RM3,705 million (2021: RM3,918 million) whose interest rate is based on 3-month USD LIBOR. To hedge the variability in cash flows of these loans, the Group has entered into 7 to 12 years (2021: 7 to 12 years) interest rate swaps with key terms (principal amount, payment dates, repricing dates, currency) that match those of the debt on which it pays a fixed rate and receives a variable rate. Instruments used by the Group Interest rate swaps currently in place cover approximately 100% (2021: 100%) of the Group’s outstanding 3-month USD LIBOR variable rate project financing loans. These loans bear variable rates based on USD LIBOR plus a certain margin, however the interest rates are fixed based on the fixed interest rates of the swaps which range between 3.89% to 5.55% (2021: 3.89% to 5.55%). The swap contracts require settlement of net interest receivable or payable every quarter. The settlement dates coincide with the dates on which interest is payable on the underlying debt.
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