Virgin Media 2012 Annual Report Download - page 63

62
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Overview
We are exposed to various market risks, including changes in foreign currency exchange rates and interest rates. Market
risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange and
interest rates. As some of our indebtedness accrues interest at variable rates, we have exposure to volatility in future
cash flows and earnings associated with variable interest rate payments.
Substantially all of our revenues, operating costs and selling, general and administrative expenses are earned and paid
in pounds sterling but we pay interest and principal obligations on some of our indebtedness in U.S. dollars and euros.
As of December 31, 2012, £2,722.3 million, or 46.3%, of our indebtedness based upon contractual obligations, was
denominated in U.S. dollars. As a result, we have exposure to volatility in future cash flows and earnings associated with
changes in foreign exchange rates on payments of principal and interest on a portion of our indebtedness. We have also
committed and forecasted purchases of goods and services in U.S. dollars, euros and South African rand.
The fair market value of long term fixed interest rate debt and the amount of future interest payments on variable interest
rate debt are subject to interest rate risk.
To mitigate the risk from these exposures, we have implemented a cash flow hedging program. The objective of this
program is to reduce but not eliminate the volatility of our cash flows and earnings caused by changes in underlying rates.
To achieve this objective we have entered into a number of derivative instruments. The derivative instruments utilized
comprise interest rate swaps, cross-currency interest rate swaps and foreign currency forward contracts. We do not enter
into derivative instruments for trading or speculative purposes.
For further details of the accounting for derivative instruments see note 8 to the consolidated financial statements in Item
8 of this Form 10-K. Further discussion of our long term debt and related derivative instruments is also contained within
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital
Resources" in Item 7 of this Form 10-K.
Sensitivity analysis
Interest rate risk
Before taking into account the impact of current hedging arrangements, as of December 31, 2012, we would have had
interest determined on a variable basis on £750 million, or 12.6%, of our long term debt. An increase in interest rates of
one percentage point would increase unhedged gross interest expense by approximately £7.5 million per year.
Exchange rate risk
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 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 exchange rates result in foreign currency gains or losses, which we have substantially mitigated through
hedges using cross currency interest rate swaps and foreign currency forward contracts. As of December 31, 2012,
£2,722.3 million, or 46.3%, of our indebtedness based upon contractual obligations, was denominated in U.S. dollars. A
1% change in the U.S. dollar to pounds sterling exchange rate would increase unhedged gross interest expense by
approximately £1.7 million per year.
We also purchase goods and services in U.S. dollars, euros and South African rand.
The following tables provide information as of December 31, 2012 and 2011 about our long term fixed and variable interest
rate debt that are sensitive to changes in interest rates and foreign currency exchange rates.
Table of Contents