Virgin Media 2006 Annual Report Download - page 167

VIRGIN MEDIA INVESTMENT HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Derivative Financial Instruments and Hedging Activities (Continued)
dollar denominated 9.125% senior notes due 2016, interest payments on our U.S. dollar denominated senior credit facility, interest
payments on our euro denominated 8.75% senior notes due 2014 and interest payments on our euro denominated senior credit facility.
Under these cross−currency swaps, we receive interest in U.S. dollars at a fixed rate of 8.75% for the 2014 senior notes and 9.125%
for the 2016 senior notes and at a variable rate based on US LIBOR for the senior credit facility. We also receive euros at a fixed rate
of 8.75% for the 2014 senior notes and at a variable rate based on EURIBOR for the senior credit facility. In exchange we make
payments of interest in pound sterling at fixed rates of 9.42% for the U.S. dollar denominated senior notes due 2014, 8.54% for the
U.S. dollar denominated senior notes due 2016, 10.26% for the euro denominated senior notes due 2014, and at a variable rate based
on LIBOR based on the pound sterling equivalent of $650 million and €500 million. The net settlement of £5.0 million under these
cross−currency interest rate swaps is included within interest expense for the year ended December 31, 2006.
We have designated principal amounts totaling $1,625 million and €725 million of these cross−currency interest rate swaps as
cash flow hedges under FAS 133 because they hedge the changes in the pound sterling value of the interest payments on our U.S.
dollar denominated senior notes and U.S. dollar and euro denominated senior credit facility, that result from changes in the U.S.
dollar, euro and pound sterling exchange rates.
In the year ended December 31, 2006, we recorded £7.4 million of unrealized losses in accumulated other comprehensive income
(loss) as a result of the increase in fair market value of these hedges. Certain cross−currency interest rate swaps entered into under our
previous financing arrangements are no longer designated as hedges under FAS 133. Changes in the fair value of these contracts are
recognized through gains (losses) on derivative instruments in our statement of operations. A gain in relation to ineffectiveness of
these swaps totaling £1.7 million is included within gain on derivative instruments for the year ended December 31, 2006.
Foreign Currency Forward Rate Contracts—Hedging the Principal Obligations of the U.S. Dollar Senior Notes and Senior Credit
Facility
As of December 31, 2006, we have outstanding foreign currency forward rate contracts to purchase $425 million, maturing in
April 2009. These contracts hedge changes in the pound sterling value of the U.S. dollar denominated principal obligation of the
8.75% senior notes due 2014 caused by changes in the U.S. dollar and pound sterling exchange rates. The principal obligations under
the $550 million 9.125% senior notes due 2016, the €225 million senior notes due 2014 and the $646 million and €498 million
principal obligations under the senior credit facility are hedged via the aforementioned cross−currency interest rate swaps, and not by
separate forward rate contracts.
These foreign currency forward rate contracts have not been designated as hedges under FAS 133. As such, the contracts are
carried at fair value on our balance sheet with changes in the fair value recognized immediately in the statement of operations. The
foreign currency forward rate contracts do not subject us to material volatility in our earnings and cash flows because changes in the
fair value partially mitigate the gains or losses on the translation of our U.S. dollar denominated debt into our functional currency
pound sterling in accordance with FAS 52, “Foreign Currency Translation”. Changes in fair value of these contracts are reported
within foreign exchange gains (losses).
F−88
Source: VIRGIN MEDIA INVESTM, 10−K, March 01, 2007