BT 2001 Annual Report Download - page 57

Risk Factors
The following describes some of the signi¢cant risks that could
a¡ect us. Additionally, some risks may be unknown to us and
other risks, currently believed to be immaterial, could turn out
to be material. All of these could materially adversely a¡ect our
business, turnover, pro¢ts, assets, liquidity and capital
resources. They should also be considered in connection with
the forward looking statements in this document and the
warning regarding forward-looking statements on page 143 of
this document. These risks include the risks relating to the BT
Wireless business which is proposed to be demerged.
Financing
To finance several significant investments and acquisitions
since November 1999, we have substantially increased our
outstanding debt. In part because of this increase, our
credit ratings were reduced during the second half of 2000
and during May 2001. Any further reduction in our ratings
would increase our cost of borrowings. Subsequent
downgrades may hinder our ability to expand and develop
our business and may affect our ability to raise short-term
finance.
During the 2001 ¢nancial year our borrowings, less short-
term investments and cash, have risen from »8.7 billion as at
31 March 2000 to »27.9 billion as at 31 March 2001, primarily
as a consequence of our cash investments in 3G mobile licences
and from acquiring interests from our former partners in
European joint ventures.
Credit rating downgrades
Due to this increase in borrowings, as well as decreased
stability and predictability of revenue streams from our new
business sectors such as mobile data services, the capital
expenditure investment needed to enhance our competitive
position in a fast changing technological environment and the
increasingly competitive nature of the UK telecommunications
market, our credit ratings on our long-term debt and senior
debt ratings were downgraded in August and September of
2000 and in May 2001. This downgrade in credit ratings has
caused an increase in our borrowing costs. Before goodwill
amortisation the net interest charge was covered 2.6 times by
total operating pro¢t for the year ended 31 March 2001 down
from 8.8 times in the year ended 31 March 2000. Our ratio of
earnings to ¢xed charges (which consists mainly of gross
interest expense) calculated in accordance with US GAAP has
decreased from 5.9 in the year ended 31 March 2000 to 0.2 in
the year ended 31 March 2001. Furthermore, our net debt has
increased during April 2001.
In February 2001, Standard and Poor’s placed us on
‘‘CreditWatch with negative implications’’. Approximately
one-third of our debt (i.e. the debt that was issued after the
ratings downgrades in August and September 2000) is subject
to covenants which would increase the interest rate if we were
subjected to further downgrades. In addition, further
downgrades would increase the cost of future borrowings, and
subsequent downgrades may hinder our ability to expand and
develop our business and may a¡ect our ability to raise short-
term ¢nance.
Debt reduction
We have indicated that we intend to reduce our debt by at least
»10 billion by 31 December 2001. Our ability to achieve this
will largely depend on the success of the rights issue and our
ability to e¡ect our restructuring programme including certain
disposals. In November 2000, we announced details of our
restructuring plans to focus resources on speci¢c geographical
areas and optimise the positioning of our individual businesses
withintheirrespectivemarkets.Wesaidwewouldfocuson
Western Europe and Japan and £oat up to 25% of BT Wireless
and Yell and that a £otation of BT Ignite was possible, to be
reviewed by the end of 2001. In addition, we described
proposals to create a new holding company to enhance
corporate £exibility, and provide scope for further subsidiary
£otations where advantageous to shareholders. We also detailed
plans to create a new network company, NetCo, which would be
both structurally and managerially separate. Following this
corporate reorganisation, and subject to the satisfactory
outcome of necessary discussions with HM Government and
Oftel, our intention was to £oat up to 25% of NetCo. Our aim
was to reduce net debt of the group by December 2001 by at
least »10 billion using the cash proceeds from the sale of equity
in these various IPOs, together with the proceeds of disposals
of non-core businesses and assets.
The weakness of the IPO market, particularly for
telecommunications companies, has caused us to review
whether the sale of equity in BT Wireless and Yell in an IPO
still constitutes the best option to strengthen our capital base.
In addition to the rights issue, we plan to demerge BT Wireless
(creating a new holding company at the same time). On
demerger the capital structure of BT Wireless is planned to
include up to »2 billion of net debt. We are reviewing our plans
for Yell and are currently considering proposals to sell or
demerge Yell. We continue with our programme of non-core
disposals which to date has included agreements to sell our
Japanese investments and our investment in Airtel which, when
completed, should reduce our net debt by »4.4 billion.
Completion is conditional upon relevant regulatory and other
approvals in Japan and Europe. We have also announced plans
to realise the value of our UK property portfolio through a sale
BT Annual report and Form 20-F 57