BT 2003 Annual Report Download - page 44

Treasury policy
The group has a centralised treasury operation whose
primary role is to manage liquidity, funding,
investment and the group’s financial risk, including
risk from volatility in currency and interest rates and
counterparty credit risk. The treasury operation is
not a profit centre and the objective is to manage
risk at optimum cost.
The Board sets the treasury department’s policy
and its activities are subject to a set of controls
commensurate with the magnitude of the borrowings
and investments under its management. Counterparty
credit risk is closely monitored and managed within
controls set by the Board. Derivative instruments,
including forward foreign exchange contracts, are
entered into for hedging purposes only.
We have set out further details on this topic and
on our capital resources and foreign currency exposure
in note 36 to the financial statements in compliance
with FRS 13.
Capital resources
During the 2003 and 2002 financial years the group
has reduced its level of borrowings so that its net debt
was £9.6 billion at 31 March 2003 compared with
£13.7 billion at 31 March 2002 and £27.9 billion at
31 March 2001. The debt reduction in the 2003 and
2002 financial years was achieved by the disposal
of our stake in Cegetel, a successful rights issue in
June 2001, the mmO
2
demerger, sales of investments
and the Yell business and the property sale and
leaseback transaction.
The directors have a reasonable expectation that
the group has adequate resources to continue in
operational existence for the foreseeable future and
therefore they continue to adopt the going concern
basis in preparing the financial statements.
There has been no significant change in the
financial or trading position of the group since
31 March 2003.
At 31 March 2003, the group had cash and short-
term investments of £6,431 million. At that date,
£2,548 million of debt falls due for repayment in the
2004 financial year. The group had unused short-term
bank facilities, amounting to approximately
£575 million at 31 March 2003.
At 31 March 2002, the group had cash and short-
term investments of £4,739 million. In addition, the
group had unused committed short-term bank
facilities, amounting to approximately £2,100 million
at 31 March 2002, in support of a commercial paper
programme or other borrowings. The group also had
£461 million of uncommitted short-term bank facilities.
Foreign currency and interest rate exposure
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 mmO
2
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
Financial review
BT Annual Report and Form 20-F 2003 43