BT 2006 Annual Report Download - page 39

OFF-BALANCE SHEET ARRANGEMENTS
As disclosed in the financial statements there are no off-balance
sheet arrangements that have or are reasonably likely to have a
current or future material effect on the group’s financial
condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditure or capital
resources, with the exception of the following:
Operating leases (note 28)
Capital commitments and guarantees (note 28)
CAPITAL RESOURCES
During the period under review the group has reduced its level
of borrowings so that its net debt was £7.5 billion at 31 March
2006 compared with £7.9 billion at 31 March 2005 (based on
BT’sdefinition of net debt as set out in note 10).
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 2006.
The following table sets out the group’s contractual
obligations and commitments as they fall due for payment, as
at 31 March 2006.
Payments due by period
Contractual obligations
and commitments
Total
£m
Less
than 1
year
£m
1-3
years
£m
3-5
years
£m
More
than 5
years
£m
Loans and other borrowings 9,078 1,622 1,225 2,814 3,417
Finance lease obligations 845 318 294 22 211
Operating lease obligations 9,782 474 888 843 7,577
Capital commitments 754 684 70 ––
Total 20,459 3,098 2,477 3,679 11,205
At 31 March 2006, the group had cash, cash equivalents and
current asset investments of £2,330 million. At that date,
£1,750 million of debt fell due for repayment in the 2007
financial year. The group had unused short-term bank facilities,
amounting to approximately £1,535 million at 31 March 2006.
These resources will allow the group to settle its obligations as
they fall due.
FINANCIAL RISK MANAGEMENT
Most of the group’s current revenue is invoiced in pounds
sterling, and most of its operations and costs arise within the
UK. The group’s foreign currency borrowings, which totalled
£5.4 billion at 31 March 2006, are used to finance its
operations. These borrowings have been predominantly
swapped into sterling. Cross currency swaps and forward
currency 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 currency
contracts to hedge foreign currency investments, interest
expense, capital purchases and purchase and sale commitments
on a selective basis. 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 on any imbalances between the value of
outgoing and incoming international calls.
A 10% strengthening in sterling against major currencies
would cause the group’s net assets at 31 March 2006 to fall by
less than £150 million, with an insignificant effect on the
group’s profits. This is consistent with the position at year
ended 31 March 2005.
The majority of the group’s long-term borrowings have been,
and are, subject to sterling fixed interest rates after applying
the impact of hedging instruments. 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 2006, the group had outstanding
interest rate swap agreements with notional principal amounts
totalling £5.1 billion compared to £5.3 billion at 31 March
2005.
The long-term debt instruments which BT issued in
December 2000 and February 2001 both contained covenants
providing 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 finance expense by
approximately £32 million. BT’s credit rating from S&P is
A minus. Based upon the total amount of debt of £5 billion
outstanding on these instruments at 31 March 2006, BT’s
annual finance expense would increase by approximately
£24 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 finance
expense would be reduced by approximately £12 million.
Based upon the composition of net debt at 31 March 2006,
a one percentage point increase in interest rates would increase
the group’s annual net finance expense by around £10 million.
This is consistent with the position at 31 March 2005.
The group considers that it is not exposed to major
concentrations of credit risk. The group, however, is exposed to
credit-related losses in the event of non-performance by
counterparties to financial instruments, but does not expect any
counterparties to fail to meet their obligations. The group limits
the amount of credit exposure to any one counterparty. Where
multiple transactions are undertaken with a single counterparty,
or group of related counterparties, the group may enter into a
netting arrangement to reduce the group’s exposure to credit
risk. Currently the group makes use of standard International
Swaps and Derivative Association (ISDA) documentation. In
addition, where management have a legal right of set off and
the ability and intention to settle net, the relevant asset and
liabilities are netted within the balance sheet. The group seeks
collateral or other security where it is considered necessary.
The group ensures its liquidity is maintained by entering into
long and short term financial instruments to support operational
and other funding requirements. The group’s liquidity and
funding management process includes projecting cash flows
and considering the level of liquid assets in relation thereto,
monitoring balance sheet liquidity and maintaining a diverse
range of funding sources and back-up facilities. Liquid assets
surplus to immediate operating requirements of the group are
generally invested and managed by the centralised treasury
function. Requirements of group companies for operating
finance are met whenever possible from central resources. The
group manages liquidity risk by maintaining adequate
committed borrowing facilities. Refinancing risk is managed by
limiting the amount of borrowing that matures within any
specific period.
The group has limited exposure to equity securities price risk
on investments held by the group.
Operating and financial review BT Group plc Annual Report and Form 20-F 2006 37