BT 2002 Annual Report Download - page 123

36. Financial instruments and risk management continued
During the year ended 31 March 2002, net debt was reduced from £27.9 billion to £13.7 billion mainly by the group's rights
issue, disposal of its Yell business, its Japanese and Spanish interests, and the property sale and leaseback transaction.
The proceeds of the rights issue and sale of assets have been applied mainly in reducing short-term borrowings. The
group has repaid substantially all of its medium-term notes and commercial paper in the year. As a result of the demerger
of the mmO2 business including its European operations, the group has swapped an additional e7 billion into ¯oating rate
sterling debt. This, in conjunction with the novation of £1 billion ®xed rate swaps to Telereal for the property transaction, has
enabled the group to maintain its ®xed:¯oating ratio at approximately 88:12.
During the year ended 31 March 2001, net debt increased from £8.7 billion to £27.9 billion mainly as a result of the
group making acquisitions of businesses and third-generation mobile licences. This increase in debt was funded primarily
by the issuance of long-term debt together with use of the group's medium-term note programme. As a result of this,
together with the group's interest rate swap activity, the borrowing pro®le changed during that year from one
mainly at ¯oating rates to one with a ®xed: ¯oating rate ratio of approximately 70:30. This change was in line with the
group's intention to limit the group's exposure to interest rate increases given the substantial size of the group's debt
portfolio at the time. During the second quarter of the year 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 2002 and the date of these
®nancial statements.
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 differences 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 effectively ®xed in the interest on part of the group's then
future borrowings, all of which have now been taken on.
At 31 March 2002, the group had outstanding interest rate swap agreements having a total notional principal amount
of £7,870 million (2001 ± £9,574 million).
(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
affected by changes in exchange rates.
At 31 March 2002, the group had outstanding foreign currency swap agreements and forward exchange contracts
having a total notional principal amount of £16,670 million (2001 ± £25,325 million).
Notes to the financial statements
122 BT Group Annual Report and Form 20-F 2002