NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2023 29. CAPITAL AND FINANCIAL RISK MANAGEMENT (continued) Financial risk management (continued) Interest rate risk The Manager adopts a proactive interest rate management policy to manage the risk associated with changes in interest rates on the Group’s loan facilities while also seeking to ensure that the ongoing cost of debt remains competitive. The Group determines the existence of an economic relationship between the hedging instrument and hedged item based on the reference interest rates, tenors, repricing dates and maturities and the notional or par amounts. If a hedging relationship is directly affected by uncertainty arising from interest rate benchmark reform, then the Group assumes for this purpose that the benchmark interest rate is not altered as a result of interest rate benchmark reform. The Group replaced its SOR interest rate derivatives used in cash flow hedging relationships with SORA by end of 2023.Therefore, there is no longer uncertainty about when and how replacement may occur with respect to the relevant hedged items and hedging instruments. Exposure to interest rate risk As at 31 December 2023, the Group has interest rate swaps (“IRS”) with notional contract amount of $1,095.0 million (2022: $1,035.0 million) and cross currency interest rate swap (“CCIRS”) with notional contract amount of $50.0 million (2022: nil). The Group classifies the IRS and CCIRS as cash flow hedges to hedge the exposure in interest rate fluctuations on certain of its term loans. The term loans and the underlying IRS have the same terms and conditions. The Manager proactively seeks to minimise the level of interest rate risk by locking the majority of the Group’s borrowings at fixed rates. As at 31 December 2023, the Group has locked in approximately 82.2% (2022: 70.4%) of its borrowings at fixed rates (excluding money market line and onshore RMB denominated loans). Fair value sensitivity analysis for fixed rate instruments The Group does not account for any fixed rate financial liabilities at fair value through profit or loss and the Group does not designate interest rate derivatives as hedging instruments under a fair value hedge accounting model. Therefore a change in interest rates at the reporting date would not affect the statement of total return. Cash flow sensitivity analysis for variable rate instruments The net change in fair value of the interest component of IRS and CCIRS as at 31 December 2023 of $26.8 million (2022: $39.6 million), representing the effective portion of the cash flow hedge, has been recognised directly in the hedging reserve. Effects of a 100 basis point (“bp”)* movement in interest rate at the reporting date would increase/ (decrease) statement of total return and Unitholders’ funds by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis for 2022. * 100 basis point is equivalent to 1 percentage point 214 CAPITALAND CHINA TRUST
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