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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 £9.4 billion at 31 March
2004, are used to finance its operations. These borrowings have
been predominantly 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
and purchase and sale commitments. The commitments hedged are
principally US dollar and euro denominated. 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.
The group’s exposure
to changes in currency movements decreased significantly following
the demerger of the mmO2 business and its European
operations in November 2001. A 10% strengthening in sterling against
major currencies would cause the group’s net assets at 31
March 2004 to fall by less than £120 million, with insignificant
effect on the group’s profit. This compares with a fall of
less than £100 million and £150 million in the years
ended 31 March 2003 and 2002, respectively.
Foreign exchange contracts
are entered into as a hedge of sales and purchases, accordingly
a change in the fair value of the hedge is offset by a corresponding
change in the value of the underlying sale or purchase.
The majority of the
group’s long-term borrowings have been, and are, 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 2004, the group had outstanding interest rate swap
agreements with notional principal amounts totalling £5,210
million compared to £5,170 million at 31 March 2003.
The long-term debt
instruments which BT issued in December 2000 and February 2001
both contained covenants that if the BT group credit rating were
downgraded below A3 in the case of Moody’s or below A minus
in the case of Standard & Poor’s (S&P), additional
interest would accrue from the next interest coupon period at
the rate of 0.25 percentage points for
each ratings category adjustment by each ratings agency. In May
2001, Moody’s downgraded BT’s credit rating to Baa1,
which increased BT’s annual interest charge by approximately
£32 million. BT’s credit rating from S&P is A minus.
Based upon the total amount of debt of £9 billion outstanding
on these instruments at 31 March 2004, BT’s annual interest
charge would increase by approximately £45 million if BT’s
credit rating were to be downgraded by one credit rating category
by both agencies below a long-term debt rating of Baa1/ A minus.
If BT’s credit rating with Moody’s was to be upgraded
by one credit rating category the annual interest charge would
be reduced by approximately £23 million.
Based
upon the composition of net debt at 31 March 2004, a one percentage
point increase in interest rates would increase the group’s
annual net interest expense by less than £15 million. This
compares with an increase of less than £10 million and less
than £20 million in the years ended 31 March 2003 and 2002,
respectively.
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