BT 2000 Annual Report Download - page 37

Financial review
36 Annual report and Form 20-F
net debt at 31 March 2001 is expected to exceed 100% of
shareholders' funds as a consequence.
Treasury policy
The group has a centralised treasury operation. Its primary
role is to manage liquidity, funding, investment and the
group's ¢nancial risk, including risk from volatility in
currency and interest rates and counterparty credit risk.
The treasury operation is not a pro¢t centre and the
objective is to manage risk at optimum cost.
The Board sets the treasury department's policy and
its activities are subject to a set of controls commensurate
with the magnitude of the investments and borrowings
under its management. Counterparty credit risk is closely
monitored and managed within controls set by the Board.
Derivative instruments, including forward foreign exchange
contracts, are entered into for hedging purposes only.
We have set out further details on this topic and on
our capital resources and foreign currency exposure in note
32 to the ¢nancial statements in compliance with FRS 13.
Capital resources
The directors have a reasonable expectation that the group
has adequate resources to continue in operational existence
for the foreseeable future and therefore they continue
to adopt the going-concern basis in preparing the
¢nancial statements.
At 31 March 2000, the group had cash and short-term
investments of »2,304 million. At that date, »5,121 million
of short-term debt was outstanding, comprising principally
»4,884 million of borrowings under BT's commercial paper
programmes. In addition, the group had unused committed
short-term bank facilities, amounting to approximately
»5,800 million at 31 March 2000, in support of a
commercial paper programme or other borrowings. The
group also has substantial uncommitted short-term
bank facilities.
At 31 March 1999, the group had cash and short-term
investments of »3,380 million. At that date, »372 million of
short-term debt was outstanding. In addition, the group
had unused committed short-term bank facilities, amounting
to approximately »150 million at 31 March 1999.
The decrease in short-term investments and increase in
short-term borrowings in the 2000 ¢nancial year was
required to ¢nance BT's acquisitions of investments during
the year.
The group had »8,700 million net debt at 31 March
2000, an increase of »7,747 million in the year. Net debt
increased substantially during the course of the 2000
¢nancial year, primarily as a result of acquisitions.
Foreign currency and interest rate exposure
Most of the group's current turnover is invoiced in pounds
sterling, and most of its operations and costs arise within
the UK. The group's foreign currency borrowings, which
totalled »7,304 million at 31 March 2000, are used to
¢nance its operations. Of these borrowings, approximately
»6.2 billion was swapped into sterling. Cross currency
swaps and forward foreign exchange contracts have been
entered into to reduce the foreign currency exposure on the
group's operations and the group's net assets. The group
also enters into forward foreign exchange contracts to
hedge investment, interest expense, purchase and sale
commitments. The commitments hedged are principally US
dollars, the euro and the yen. As a result of these policies,
the group's exposure to foreign currency arises mainly on
the residual currency exposure on non-UK investments in
its ventures and on any imbalances between the value of
outgoing and incoming international calls with Concert. To
date, these imbalances have not been material. As a result,
the group's pro¢t has not been materially a¡ected by
movements in exchange rates, with the exception of the
second half of the 1999 ¢nancial year when we had a large
US dollar position with the short-term investments
resulting from the MCI proceeds. We progressively closed
out this exposure in the period to 31 March 1999 as the US
dollar strengthened against sterling and, as noted above,
we recorded a gain of »87 million, which was included in
the pro¢t for the 1999 ¢nancial year.
The majority of the group's long-term borrowings has
been, and is, subject to ¢xed interest rates. The group has
entered into interest rate swap agreements with commercial
banks and other institutions to vary the amounts and
period for which interest rates are ¢xed. At 31 March 2000,
the group had outstanding interest rate swap agreements
and gilt locks (based on forward sales of HM Government
treasury stock) with notional principal amounts totalling
»2,073 million. At 31 March 1999, the group had
outstanding interest rate swap agreements with notional
principal amounts totalling »1,371 million.
At the start of the 2000 ¢nancial year, the group was
not signi¢cantly exposed to changes in interest rates.
However, with the greater use of £oating rate debt in the
2000 ¢nancial year, this has increased the group's
sensitivity to changes in short-term sterling interest rates.
Based upon the composition of net debt at 31 March 2000, a
one percentage point increase in interest rates would
increase the group's annual net interest expense by less than
»55 million. This compares with a decrease in the annual
net interest expense of »35 million based on the composition
of net debt at 31 March 1999 using the same variation in