BT 2001 Annual Report Download - page 119

35. Financial instruments and risk management (continued)
ended 31 March 2001, it was not practical for the group to issue longer-term debt in the global capital markets. The group
therefore pre-hedged its desired ¢xed rate pro¢le by transacting »9.3 billion of interest rate swaps with maturities ranging from
¢ve to 30 years at a weighted average ¢xed interest payable rate of 6.2%.
During the year ended 31 March 2000, net debt increased from »953 million to »8,700 million primarily as a result of the
group making acquisitions of businesses and interests in joint ventures and associates. This increase in debt was primarily
funded under the group’s commercial paper programmes. As a result, the group’s borrowing pro¢le changed during that year
from one at ¢xed rates to one mainly at £oating rates.
The group uses ¢nancial instruments to hedge some of its currency exposures arising from its non-UK assets, liabilities and
forward purchase commitments. The group also hedges some of its interest liabilities. The ¢nancial instruments used comprise
borrowings in foreign currencies, forward foreign currency exchange contracts, gilt locks and interest and currency swaps.
There has been no change in the nature of the group’s risk pro¢le between 31 March 2001 and the date of these ¢nancial
statements.
The risk pro¢le of the group is likely to change following the completion of the rights issued announced on 10 May 2001,
and the proceeds due to be received on the planned disposals of the investments in Japan and elsewhere which have been
announced to date (see note 29). In May 2001, Moody’s downgraded BT’s credit rating to Baa1, which will increase BT’s annual
interest charge by »32 million.
The notional amounts of derivatives summarised below do not necessarily represent amounts exchanged by the parties and,
thus, are not necessarily a measure of the exposure of the group through its use of derivatives. The amounts exchanged are
calculated on the notional amounts and other terms of the derivatives which relate to interest and exchange rates.
(a) Interest rate risk management
The group has entered into interest rate swap agreements with banks and other institutions to vary the amounts and periods for
which interest rates on borrowings are ¢xed. Under interest rate swaps, the group agrees with other parties to exchange, at
speci¢ed intervals, the di¡erences between ¢xed rate and £oating rate interest amounts calculated by reference to an agreed
notional principal amount. Under gilt locks, forward sales of UK government long-dated treasury stock were entered into for
periods of up to one year. This hedge e¡ectively ¢xed in the interest on part of the group’s then future borrowings, all of which
have now been taken on.
At 31 March 2001, the group had outstanding interest rate swap agreements having a total notional principal amount of
»9,574 million (2000 ^ »2,073 million, including gilt locks).
(b) Foreign exchange risk management
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
investments, interest expense and purchase and sale commitments denominated in foreign currencies (principally US dollars, the
euro and the yen). The remaining terms of the currency swaps are up to 30 years and the terms of currency forward exchange
contracts are typically less than one year. The purpose of the group’s foreign currency hedging activities is to protect the group
from the risk that the eventual net in£ows and net out£ows will be adversely a¡ected by changes in exchange rates.
At 31 March 2001, the group had outstanding foreign currency swap agreements and forward exchange contracts having a
total notional principal amount of »25,325 million (2000 ^ »11,948 million).
The fair values of forward foreign currency contracts at 31 March 2001 were »4,388 million (2000 ^ »7,088 million) for
purchases of currency and »601 million (2000 ^ »1,852 million) for sales of currency. These fair values have been estimated by
calculating their present values using the market discount rates, appropriate to the terms of the contracts, in e¡ect at the balance
sheet dates.
At 31 March 2001, the group had deferred unrealised gains of »13 million (2000 ^ »18 million) and losses of »34 million
(2000 ^ »43 million), based on dealer-quoted prices, from hedging purchase and sale commitments, and in addition had deferred
realised net gains of »25 million (2000 ^ »11 million). These are included in the pro¢t and loss account as part of the hedged
purchase or sale transaction when it is recognised, or as gains or losses when a hedged transaction is no longer expected to occur.
BT Annual report and Form 20-F 119