BT 2001 Annual Report Download - page 120

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35. Financial instruments and risk management (continued)
(c) Concentrations of credit risk and credit exposures of financial instruments
The group considers that it is not exposed to major concentrations of credit risk. The group, however, is exposed to credit-related
losses in the event of non-performance by counterparties to ¢nancial instruments, but does not expect any counterparties to fail to
meet their obligations. The group limits the amount of credit exposure to any one counterparty. The group does not normally see
the need to seek collateral or other security.
The long-term debt instruments issued in December 2000 and February 2001 both contain covenants that if the group credit
rating is downgraded below A3 in the case of Moody’s or below A minus in the case of S&P, additional interest accrues from the
next interest coupon period at the rate of 0.25 percentage points for each ratings category adjustment by each ratings agency.
Based upon the total amount of debt of »12,930 million outstanding on these instruments at 31 March 2001, the group’s annual
interest charge would increase by »65 million if the group’s credit rating was to fall by one credit rating category below a long-
term debt rating of A3/A minus.
(d) Fair value of financial instruments
The following table shows the carrying amounts and fair values of the group’s ¢nancial instruments at 31 March 2001 and 2000.
The carrying amounts are included in the group balance sheet under the indicated headings, with the exception of derivative
amounts, which are included in debtors or other creditors or as part of net debt as appropriate. The fair values of the ¢nancial
instruments are the amount at which the instruments could be exchanged in a current transaction between willing parties, other
than in forced or liquidation sale.
Carrying amount Fair value
2001
£m
2000
£m
2001
£m
2000
£m
Non-derivatives:
Assets
Cash at bank and in hand 412 253 412 253
Short-term investments (a) 2,557 2,051 2,562 2,052
Fixed asset investments – loans to joint ventures (b) 737 1,073 737 1,073
Liabilities
Short-term borrowings (c) 10,220 5,121 10,219 5,121
Long-term borrowings, excluding finance leases (d) 20,592 5,874 20,852 6,085
Derivatives relating to investments and borrowings (net) (e):
Assets 259 44 ––
Liabilities ––350 100
Derivative financial instruments held or issued to hedge the current exposure on expected
future transactions (net):
Assets ––––
Liabilities ––21 25
(a) The fair value of listed short-term investments were estimated based on quoted market prices for those investments. The carrying amount of the other
short-term deposits and investments approximated to their fair values due to the short maturity of the instruments held.
(b) The fair value of loans to joint ventures approximated to carrying value due to loans bearing commercial rates of interest.
(c) The fair value of short-term borrowings approximated to carrying value due to the short maturity of the instruments.
(d) The fair value of the group’s bonds, debentures, notes and other long-term borrowings has been estimated on the basis of quoted market prices for the same or
similar issues with the same maturities where they existed, and on calculations of the present value of future cash flows using the appropriate discount rates in
effect at the balance sheet dates, where market prices of similar issues did not exist.
(e) The fair value of the group’s outstanding foreign currency and interest rate swap agreements was estimated by calculating the present value, using appropriate
discount rates in effect at the balance sheet dates, of affected future cash flows translated, where appropriate, into pounds sterling at the market rates in effect
at the balance sheet dates.
The following information is provided in accordance with the requirements of FRS 13 ^ ‘‘Derivatives and other ¢nancial
instruments: disclosures’’. Except for disclosures under currency exposures below, the ¢nancial information excludes all of the
group’s short-term debtors and creditors.
Notes to the financial statements
120 BT Annual report and Form 20-F