Virgin Media 2008 Annual Report Download - page 86

We are subject to interest rate risk because we have substantial indebtedness at variable interest
rates. As of December 31, 2008, interest is determined on a variable basis on £4,004.4 million, or
67.3%, of our indebtedness. An increase in interest rates of 0.25% would increase our gross interest
expense by £10.1 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,
operating costs and selling, general and administrative 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 sterling 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, 2008, £1,714.8 million, or
27% of our indebtedness, was denominated in U.S. dollars and £617.8 million, or 10% of our
indebtedness, was denominated in euros. We also purchase goods and services in U.S. dollars and
euros.
Interest Rate Swaps
We have entered into a number of interest rate swaps to mitigate the risk relating to 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 4.81% 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. All 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 an accounting hedge, or through (loss) gain on
derivatives where not designated as an accounting hedge. The amounts initially recorded in other
comprehensive income (loss) are then recorded in the statement of operations when the underlying
hedged item impacts the statement of operations.
Cross-currency Interest Rate Swaps
We have entered into a number of cross-currency interest rate swaps to mitigate the risk relating
to 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 pounds 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. All cross-currency
interest rate swaps are recognized as either assets or liabilities and measured at fair value. Changes in
the fair value of these instruments are initially recorded within other comprehensive income (loss)
where designated as an accounting hedge, or through (loss) gain on derivatives where not designated as
an accounting hedge. The amounts initially recorded in other comprehensive income (loss) are then
recorded in the statement of operations when the underlying hedged item impacts the statement of
operations.
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