BT 2009 Annual Report Download - page 48

ADDITIONAL INFORMATION FINANCIAL STATEMENTS REPORT OF THE DIRECTORS BUSINESS AND FINANCIAL REVIEWS OVERVIEW
46 BT GROUP PLC ANNUAL REPORT & FORM 20-F
BUSINESS AND FINANCIAL REVIEWS FINANCIAL REVIEW
Credit risk management
The group’s exposure to credit risk arises from financial assets
transacted by the centralised treasury operation (primarily
derivatives, investments, cash and cash equivalents) and from its
trading related receivables. For treasury related balances, the Board
defined policy restricts exposure to any one counterparty by setting
credit limits based on the credit quality as defined by Moody’s and
Standard and Poor’s and by defining the types of financial
instruments which may be transacted. The minimum credit ratings
permitted with counterparties are A3/A– for long-term and P1/A1
for short-term. The centralised treasury operation continuously
reviews the limits applied to counterparties and will adjust the limit
according to the nature and credit standing of the counterparty up
to the maximum allowable limit set by the Board. Management
review significant utilisations on a regular basis to determine the
adjustments required, if any, and actively manage any exposures
which may arise. Where multiple transactions are undertaken with a
single counterparty, or group of related counterparties, the group
may enter into netting arrangements 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 possible, the group will seek a
combination of a legal right of set off and net settlement. The
group also seeks collateral or other security where it is considered
necessary. During the 2009 financial year, the centralised treasury
operation tightened the credit limits applied when investing with
counterparties in response to market conditions, continued to
monitor their credit quality and actively managed any exposures
which arose.
Note 17 discloses the credit concentration and credit quality of
derivative financial assets. After applying a legal right of set off
under the group’s ISDA documentation, the group had a net
exposure to derivative counterparties of £2,282m. Of this, 85%
was with six counterparties. The majority of these derivatives are in
designated cash flow hedges. With all other factors remaining
constant and based on the composition of net derivative financial
assets at 31 March 2009, a 100 basis point increase in yield curves
across each of the ratings categories within which these derivative
financial assets are classified would reduce their carrying values and
impact equity, pre-tax, as follows:
Impact of 100
basis point
increase
£m
Moody’s/S&P credit rating
Aa2/AA (18)
Aa3/AA– (21)
A1/A+ (92)
A2/A (146)
A3/A– –
(277)
The group’s credit policy for trading related financial assets is
applied and managed by each of the lines of business to ensure
compliance. The policy requires that the creditworthiness and
financial strength of customers is assessed at inception and on an
ongoing basis. Payment terms are set in accordance with industry
standards. The group will also enhance credit protection when
appropriate, taking into consideration the customer’s exposure to
the group, by applying processes which include netting and
offsetting, and requesting securities such as deposits, guarantees
and letters of credit. The group has taken proactive steps to
minimise the impact of adverse market conditions on trading
related financial assets. The concentration of credit risk for trading
balances of the group is provided in note 15 which analyses
outstanding balances by line of business and reflects the nature of
customers in each segment.
Liquidity risk management
The group ensures its liquidity is maintained by entering into short,
medium and long-term financial instruments to support
operational and other funding requirements. On at least an annual
basis the Board reviews and approves the maximum long-term
funding of the group and on an ongoing basis considers any related
matters. Short and medium-term requirements are regularly
reviewed and managed by the centralised treasury operation within
the parameters set by the Board. The primary objective of the
group’s capital management policy is to target a solid investment
grade credit rating whilst continuing to invest for the future and,
with an efficient balance sheet, further enhance the return to
shareholders.
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. The Board reviews group forecasts, including cash flow
forecasts, on a quarterly basis. The centralised treasury operation
reviews cash flows more frequently to assess the short and
medium-term requirements. These assessments ensure the group
responds to possible future cash constraints in a timely manner.
Liquid assets surplus to immediate operating requirements of the
group are generally invested and managed by the centralised
treasury operation. Operating finance requirements of group
companies are met whenever possible from central resources.
The group has a European Medium Term Note programme and a
US Shelf registration in place of which €3.9bn and $6.9bn,
respectively, have been utilised. During the 2009 and 2008
financial years the group issued commercial paper and held cash,
cash equivalents and current asset investments in order to manage
short-term liquidity requirements. At 31 March 2009, the group
had an undrawn committed borrowing facility of up to £1,500m.
The facility is available for the period to January 2013. The group
had an additional undrawn committed borrowing facility of £900m,
of which £800m was agreed in the 2009 financial year (2008:
£835m), with a further £100m agreed after the balance sheet
date. This facility is for a term of 364 days from March 2009 with a
one-year term out.
BUSINESS AND FINANCIAL REVIEWS