Virgin Media 2007 Annual Report Download - page 78

indebtedness. An increase in interest rates of 0.25% would increase our gross interest expense by
£12 million per year, before giving effect to interest rate swaps.
We are also subject to currency exchange rate risks, because substantially all of our revenues and
operating expenses are paid in U.K. pounds sterling, but we pay interest and principal obligations with
respect to a portion of our indebtedness in U.S. dollars and euros. To the extent that the pound
declines in value against the U.S. dollar and the euro, the effective cost of servicing our U.S. dollar and
euro denominated debt will be higher. Changes in the exchange rate result in foreign currency gains or
losses. As of December 31, 2007, £807.9 million, or 14% of our indebtedness, was denominated in
U.S. dollars and £522.1 million, or 9% of our indebtedness, was denominated in euros.
Interest Rate Swaps
We have entered into a number of interest rate swaps to hedge the variability in future interest
payments on our senior credit facility, which accrues interest at variable rates based on LIBOR. The
interest rate swaps allow us to receive interest based on LIBOR in exchange for payments of interest at
fixed rates between 4.68% and 5.38%.
We have designated some of the interest rate swaps as cash flow hedges under FAS 133 because
they hedge against changes in LIBOR. The interest rate swaps are recognized as either assets or
liabilities and measured at fair value. Changes in the fair value are recorded within other
comprehensive income (loss).
Cross-currency Interest Rate Swaps
We have entered into a number of cross-currency interest rate swaps to hedge the variability in the
pound sterling value of interest payments on the U.S. dollar denominated 8.75% senior notes due 2014,
interest payments on the euro denominated 8.75% senior notes due 2014, interest payments on the
U.S. dollar denominated senior notes due 2016 and interest payments on the U.S. dollar and euro
denominated tranches of our senior credit facility. Under these cross-currency interest rate swaps, we
receive interest in U.S. dollars at various fixed and floating rates and in euros at various fixed and
floating rates in exchange for payments of interest in pound sterling at various fixed and floating rates.
We have designated some of the cross-currency interest rate swaps as cash flow hedges under
FAS 133, because they hedge against changes in the pound sterling value of the interest payments on
the senior notes that result from changes in the U.S. dollar and euro exchange rates. The cross-
currency interest rate swaps are recognized as either assets or liabilities and measured at fair value.
Changes in the fair value are recorded within other comprehensive income (loss) where designated as a
hedge, or through (loss) gain on derivatives where not designated as a hedge.
Foreign Currency Forward Contracts
We have entered into a number of forward contracts maturing on April 14, 2009 to purchase a
total of $425 million. 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. The principal obligations under the A225 million
8.75% senior notes due 2014, the $550 million 9.125% senior notes due 2016, and the $628 million and
A485 million principal obligations under the senior credit facility are hedged via the cross-currency
interest rate swaps, and therefore separate forward rate contracts for these debt instruments were not
necessary.
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 income statement. The foreign currency forward rate contracts do not
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