Virgin Media 2008 Annual Report Download - page 130

VIRGIN MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 10—Derivative Financial Instruments and Hedging Activities (Continued)
changes in the amount of future cash flows attributable to changes in LIBOR. Some of these interest
rate swaps are no longer effective under the criteria of FAS 133 due to the prepayments made during
2007 and 2008 under the senior credit facility. Changes in the fair value of these contracts are
recognized through gains (losses) on derivative instruments in our consolidated statement of operations.
Cross-Currency Interest Rate Swaps—Hedging the Interest Payments of Senior Notes and Senior Credit
Facility
As of December 31, 2008, we had outstanding cross-currency interest rate swaps with principal
amounts of $2,528 million and A653 million. We currently mitigate the interest and foreign exchange
rate risks relating to 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, interest payments due on the U.S. dollar denominated 6.50% convertible notes due 2016 and
interest payments on the euro denominated 8.75% senior notes due 2014. Under these cross-currency
interest rate swaps, we receive interest in U.S. dollars at a fixed rate of 8.75% for the 2014 senior
notes, 6.50% for the 2016 convertible senior notes and 9.125% for the 2016 senior notes. We also
receive interest in 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, 6.93% for the U.S. dollar denominated convertible senior notes due 2016, 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 principal and 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 accounting 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 consolidated statement
of operations.
Foreign Currency Forward Rate Contracts—Hedging the Principal Obligations of the U.S. Dollar Senior
Notes
As of December 31, 2008, we had 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 relating to 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 consolidated 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 the functional currency pound sterling in accordance with FAS 52, Foreign
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