Virgin Media 2007 Annual Report Download - page 118

VIRGIN MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Derivative Financial Instruments and Hedging Activities (Continued)
interest at fixed rates between 4.68% and 5.38%. All of the interest rate swaps entered into as part of
our current financing arrangements became effective during 2006 and mature in April 2009.
We have designated all of the interest rate swaps entered into as part of our current financing
arrangements as cash flow hedges under FAS 133 because they are highly effective hedges against
changes in the amount of future cash flows attributable to changes in LIBOR. Certain interest rate
swaps originally entered into under our previous financing arrangements are not 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.
Cross-Currency Interest Rate Swaps—Hedging the Interest Payments of Senior Notes and Senior Credit
Facility
As of December 31, 2007, we have outstanding cross-currency interest rate swaps with principal
amounts of $1,625 million and A725 million. We currently hedge the pound sterling value of interest
payments on the U.S. dollar denominated 8.75% senior notes due 2014, interest payments on the
U.S. dollar denominated 9.125% senior notes due 2016 and interest payments on our euro
denominated 8.75% senior notes due 2014. 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.
We also receive euros at a fixed rate of 8.75% for the 2014 senior notes. 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 and 10.26% for the euro
denominated senior notes due 2014.
We have designated principal amounts totaling $975 million and A225 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 and euro denominated senior notes,
that result from changes in the U.S. dollar, euro and pound sterling exchange rates. Certain cross-
currency interest rate swaps entered into under our previous and current financing arrangements are no
longer designated as hedges under FAS 133 but continue to mitigate our exposure to interest rate and
foreign exchange rate risks. Changes in the fair value of these contracts are recognized through gains
(losses) on derivative instruments in our statement of operations.
Foreign Currency Forward Rate Contracts—Hedging the Principal Obligations of the U.S. Dollar Senior
Notes
As of December 31, 2007, we have outstanding foreign currency forward rate contracts to purchase
$425 million, maturing in April 2009. These contracts economically 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.
These foreign currency forward rate contracts have not been designated as accounting 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 currency transaction gains (losses).
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