28. Financial Instruments and Risk Management
The company manages interest rate exposures by using a diversified portfolio of fixed and floating rate instruments. Its sensitivity to fluctuations in interest rates is substantially limited to certain of its cash and cash equivalents, investments in auction rate securities, short-term debt and long-term debt. During 2007, the company did not enter into any interest rate swaps. During 2006, the company terminated its interest rate swap contracts that effectively converted a notional amount of $300.0 of fixed rate debt (due 2011) into floating rate debt for cash proceeds of $5.2 and a gain of $5.1. Hedge accounting was discontinued prospectively. The associated gains are being amortized over the remaining term of the related debt as a reduction to interest expense. No interest rate swap contracts were outstanding as at December 31, 2007 or 2006.
The company is exposed to credit-related losses in the event of non-performance by counterparties to derivative financial instruments. It anticipates, however, that counterparties will be able to fully satisfy their obligations under the contracts. The major concentration of credit risk arises from the company's receivables. A majority of its sales are in North America and are primarily for use in the agricultural industry. The company seeks to manage the credit risk relating to these sales through a credit management program. Internationally, the company's products are sold primarily through two export associations whose accounts receivable are substantially insured or secured by letters of credit. In addition, the company is exposed to liquidity and credit risk on investments in auction rate securities due to the current lack of liquidity for the investments in auction rate securities held in the company's trading account that has existed since August 2007. Due to the lack of liquidity, the securities have been held longer than the approximately 28 days that was originally anticipated. The auction rate securities consist of collateralized loan obligations consisting primarily of corporate bonds with a face value of $48.3 and collateralized debt obligations consisting primarily of publicly traded debt with a face value of $84.2. Of the total $76.5 unrealized decrease in the fair value of investments in auction rate securities, $50.0 is included in OCI and $26.5 is included in net income (see Note 8). The company is uncertain as to when the liquidity for such securities will improve.
Fair Value
Due to their short-term nature, the fair value of cash and cash equivalents, accounts receivable, short-term debt, and accounts payable and accrued charges is assumed to approximate carrying value. The effective interest rate on the investments in auction rate securities held within the company's trading account at December 31, 2007 was 13.40 percent (2006 – 5.33 percent). The effective interest rate on the company's short-term debt at December 31, 2007 was 5.17 percent (2006 – 5.51 percent). The fair value of the company's notes payable at December 31, 2007 approximated $1,364.8 (2006 – $1,776.8) and reflects a current yield valuation based on observed market prices. The current yield on the notes payable ranges from 4.64 percent to 6.45 percent (2006 – 5.47 percent to 6.16 percent). The fair value of the company's other long-term debt instruments approximated carrying value.