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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 £12.3 billion at 31
March 2003, 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. 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 in the three years under
review.
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 2003 to fall by less than £100 million,
with insignificant effect on the group’s profit.
This compares with a fall of less than £150 million
and £1,200 million in the years ended 31 March
2002 and 2001, 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 2003, the group had outstanding interest
rate swap agreements with notional principal amounts
totalling £5,170 million compared to £7,870
million at 31 March 2002.
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 £12 billion outstanding
on these instruments at 31 March 2003, BT’s annual
interest charge would increase by approximately £60
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 £30 million.
Based
upon the composition of net debt at 31 March 2003, a
one percentage point increase in interest rates would
increase the group’s annual net interest expense
by less than £10 million. This compares with an
increase of less than £20 million and less than
£90 million in the years ended 31 March 2002 and
2001 respectively. The group’s exposure to interest
rate fluctuations has reduced in line with the decrease
in net debt and the increased percentage of the group’s
net debt being at fixed rates.
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