The overall financial risk management guidelines are set out in NORDEN’s finance policy, which has been approved by the Board of Directors. The finance policy determines the limits for the Group’s currency, investment, finance and credit risks in relation to financial counterparties. All financial positions are recognised on a ”market to market” basis.

 

The Group’s functional currency is USD. Accordingly, the Company records and reports amounts in USD.

 

The Company endeavours to match expenses against income and liabilities against assets in terms of currency. Furthermore, as many expenses and liabilities as possible are denominated in USD. The actual foreign exchange risk is thus limited to those cash flows that are not denominated in USD, primarily administrative expenses (DKK), certain commercial payments (JPY and EUR) and the payment of shareholder dividends (DKK).

 

A 10% rise in exchange rates in foreign currencies against USD at the end of 2007 would, all other things being equal, have the following effect before tax on equity and income statement in the mentioned currencies stated in USD’000:

 

 

The financial instruments denominated in foreign currencies largely consist of receivables and payables, bank deposits and forward exchange transactions.

 

In connection with the Group’s payments relating to existing agreements to purchase 3 vessels in JPY, the foreign exchange risk has been hedged by means of forward buying of JPY. The payments amount to JPY 10,444, equalling the equivalent of USD 94 million. Exchange rate adjustments up to the payment dates are taken to equity and subsequently recognised together with the asset (vessel) to which the payment relates.

 

Receivables and payables in currencies other than USD represent a net liability of USD 4 million (USD 5 million), which has not been hedged.

 

In 2008, payments in DKK are expected to total the equivalent of approximately USD 75 million, excluding dividend. The Company hedges these payments for a period of between 6-24 months, depending on the development of the USD/DKK exchange rate.

 

As there seems to be no clear correlation between freight rates and vessel prices on the one hand and US interest rates on the other, it is Company policy to lock the interest rate for the entire loan portfolio for a period of between two and six years. The interest rate is normally locked for each vessel loan individually on the basis of the degree and term of financing, the loan repayment profile, the duration of the vessel’s fixed employment, anticipated sale, the interest rate level and the yield curve.

 

In recent years, the Company has chosen to purchase vessels for cash and only raise loans secured on vessels if it is able to obtain highly favourable financing terms. In 2007, the Group raised loans on vessels in a nominal amount of USD 20 million (USD 80 million) at highly attractive financing terms.

 

It is the Company’s general assessment that it is not attractive to mortgage vessels as an investment. This is due to the costs of mortgaging vessels and the risk/return ratio currently prevailing in the financial markets.

 

The Company’s interest rate risk on non-current debt has been fixed for a period of 3.6 years at an interest rate of 3.96% including the lenders’ margin.

 

At the end of 2007, the majority of the Group’s excess liquidity was placed in short-term, fixed-interest deposits.

 

Based on the Group’s liquidity and debt at the end of 2007, a 1% interest rate drop would, all other things being equal, have an effect of USD -6 million (USD -3 million) on the Group’s financial performance before tax.

 

In 2008, the Company will continue to place excess liquidity in bank deposits and liquid interest-bearing instruments of short duration and low credit risk.