Virgin Media 2009 Annual Report Download - page 88

We are subject to interest rate risk because we have substantial indebtedness at variable interest
rates. As of December 31, 2009, interest is determined on a variable basis on £3,112.8 million, or
50.8%, of our indebtedness based upon contractual obligations. An increase in interest rates of 0.25%
would increase our gross interest expense by £7.8 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, 2009, £2,495.5 million, or
40.7%, of our indebtedness based upon contractual obligations, was denominated in U.S. dollars and
£558.0 million, or 9.1%, of our indebtedness based upon contractual obligations, was denominated in
euros. We also purchase goods and services in U.S. dollars, euros and South African rand.
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 1.485% and 3.049%.
We have designated some of the interest rate swaps as cash flow hedges 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, interest payments on the
U.S. dollar denominated 8.375% senior notes due 2019 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, 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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