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Most of the group’s current
turnover is invoiced in pounds sterling, and most of its operations and costs
arise within the UK. The group’s foreign currency borrowings, which totalled
£24.9 billion at 31 March 2001, are used to finance its operations. Of these
borrowings, approximately £19.1 billion was swapped into sterling. Cross
currency swaps and forward foreign exchange contracts have been entered into to
reduce the foreign currency exposure on the group’s operations and the group’s
net assets. The group also enters into forward foreign exchange contracts to
hedge investment, interest expense, purchase and sale commitments. The
commitments hedged are principally US dollars, the euro and the yen. As a
result of these policies, the group’s exposure to foreign currency arises
mainly on the residual currency exposure on its non-UK investments in its
subsidiaries and ventures and on any imbalances between the value of outgoing
and incoming international calls with Concert. To date, these imbalances have
not been material. As a result, the group’s profit has not been materially
affected by movements in exchange rates, with the exception of the second half
of the 1999 financial year when we had a large US dollar position with the
short-term investments resulting from the MCI proceeds. We progressively closed
out this exposure in the period to 31 March 1999 as the US dollar strengthened
against sterling and, as noted above, we recorded a gain of £87 million, which
was included in the profit for the 1999 financial year.
The majority of the group’s
long-term borrowings has been, and is, subject to fixed interest rates. The
group has entered into interest rate swap agreements with commercial banks and
other institutions to vary the amounts and period for which interest rates are
fixed. At 31 March 2001, the group had outstanding interest rate swap agreements
with notional principal amounts totalling £9,574 million. At 31 March 2000, the
group had outstanding interest rate swap agreements and gilt locks (based on
forward sales of HM Government treasury stock) with notional principal amounts
totalling £2,073 million.
The long-term debt
instruments issued in December 2000 and February 2001 both contain covenants
that if the BT group credit rating is downgraded below A3 in the case of
Moody’s or below A minus in the case of Standard & Poor’s, additional
interest accrues from the next interest coupon period at the rate of 0.25
percentage points for each ratings category adjustment by each ratings agency.
Based upon the total amount of debt of £12,930 million outstanding on these
instruments at 31 March 2001, BT’s annual interest charge would increase by £65
million if BT’s credit rating was to fall by one credit rating category by both
agencies below a long-term debt rating of A3/A minus. In May 2001, Moody’s
downgraded BT’s credit rating to Baa1, which will increase BT’s annual interest
charge by £32 million. Our credit rating from S&P’s is A minus.
The greater use of floating
rate debt in the 2001 and 2000 financial years has increased the group’s
sensitivity to changes in short-term sterling interest rates. Based upon the
composition of net debt at 31 March 2001, a one percentage point increase in
interest rates would increase the group’s annual net interest expense by less
than £90 million. Based upon the composition of net debt at 31 March 2000, a
one percentage point increase in interest rates would have increased the
group’s annual net interest expense by less than £55 million. This compares
with a decrease in the annual net interest expense of £35 million based on the
composition of net debt at 31 March 1999 using the same variation in interest
rates. The greater effect over the 2000 financial year is due to the increase
in BT’s floating rate borrowings. The change in effect during the 2000
financial year was due to the change from an excess of short-term investments
over short-term borrowings at the beginning of the 2000 financial year to an
excess of short-term borrowings over short-term investments at its end.
The group’s exposure to
changes in currency rates has increased following significant investment in Germany.
A 10% strengthening in sterling against major currencies would cause the
group’s net assets at 31 March 2001 to fall by less than £1,200 million, with
insignificant effect on the group’s profit. This compares with a fall of less
than £500 million in net assets based on the group’s net assets at 31 March
2000 using the same variation in currency rates. The increase in effect of
currency movements over the year was due to the greater proportion of the
group’s net assets deployed in non-UK countries following its significant
investments in Germany and other European countries in the year. Because
foreign exchange contracts are entered into as a hedge of sales and purchases,
a change in the fair value of the hedge is offset by a corresponding change in the
value of the underlying sale or purchase. |
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