BT 2002 Annual Report Download - page 42

We have set out further details on this topic and on our
capital resources and foreign currency exposure in note 36
to the ®nancial statements in compliance with FRS 13.
Capital resources
During the 2002 ®nancial year the group has reduced its
level of borrowings so that its net debt was £13.7 billion at
31 March 2002 compared with £27.9 billion a year earlier.
During the 2001 ®nancial year, the group had increased its
level of borrowings from £8.7 billion at 31 March 2000. The
debt reduction in the 2002 ®nancial year was achieved by
our successful rights issue in June 2001, the mmO2
demerger, sales of investments and the Yell business and
the property sale and leaseback transaction.
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.
There has been no signi®cant change in the ®nancial or
trading position of the group since 31 March 2002.
At 31 March 2002, the group had cash and short-term
investments of £4,739 million. At that date, £2,195 million of
debt falls due for repayment in the 2003 ®nancial year. In
addition, the group had unused committed short-term bank
facilities, amounting to approximately £2,100 million at
31 March 2002, in support of a commercial paper
programme or other borrowings. The group also has
£461 million of uncommitted short-term bank facilities.
At 31 March 2001, the group had cash and short-term
investments of £2,969 million. At that date, £11,629 million
of short-term debt was outstanding, comprising principally
£3,494 million of borrowings under BT's commercial paper
programmes and £7,094 million under its medium-term
note programme. In addition, the group had unused
committed short-term bank facilities, amounting to
approximately £16,750 million at 31 March 2001, in support
of a commercial paper programme or other borrowings.
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 £14.3 billion at 31 March 2002, are used to ®nance
its operations. Of these borrowings, approximately
£13.6 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 and 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 its non-UK
investments in its subsidiaries and ventures and on any
imbalances between the value of outgoing and incoming
international calls. To date, these imbalances have not been
material. As a result, the group's pro®t has not been
materially affected by movements in exchange rates in the
three years under review.
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 2002, the
group had outstanding interest rate swap agreements with
notional principal amounts totalling £7,870 million compared
to £9,574 million at 31 March 2001.
The long-term debt instruments which BT issued in
December 2000 and February 2001 both contained
covenants that if the BT group credit rating were
downgraded below A3 in the case of Moody's or below A
minus in the case of Standard & Poor's (S&P), additional
interest would accrue from the next interest coupon period
at the rate of 0.25 percentage points for each ratings
category adjustment by each ratings agency. In May 2001,
Moody's downgraded BT's credit rating to Baa1, which
increases BT's annual interest charge by approximately
£32 million. BT's credit rating from S&P is A minus. Based
upon the total amount of debt of £12.8 billion outstanding
on these instruments at 31 March 2002, BT's annual
interest charge would increase by approximately £65 million
if BT's credit rating was to fall by one credit rating category
by both agencies below a long-term debt rating of Baa1/A
minus.
Based upon the composition of net debt at 31 March
2002, a one percentage point increase in interest rates
would increase the group's annual net interest expense by
less than £20 million. Based upon the composition of net
debt at 31 March 2001, a one percentage point increase in
interest rates would have increased the group's annual net
interest expense by less than £90 million.
The group's exposure to changes in currency rates
decreased following the demerger of the mmO2 business
including its activities in Europe. A 10% strengthening in
sterling against major currencies would cause the group's
net assets at 31 March 2002 to fall by less than £150 million,
with insigni®cant effect on the group's pro®t. This compares
with a fall of less than £1,200 million in net assets based on
the group's net assets at 31 March 2001 using the same
variation in currency rates. Foreign exchange contracts are
entered into as a hedge of sales and purchases,
accordingly a change in the fair value of the hedge is offset
by a corresponding change in the value of the underlying
sale or purchase.
Capital expenditure
Capital expenditure on plant, equipment and property
totalled £3,908 million in the 2002 ®nancial year, compared
with £4,986 million in the 2001 ®nancial year and
£3,680 million in the 2000 ®nancial year. Of the total capital
expenditure, £3,100 million, £3,857 million and
£3,160 million were in relation to the group's continuing
activities in the 2002, 2001 and 2000 ®nancial years,
respectively. Work continues on enhancing the intelligence
Financial review
BT Group Annual Report and Form 20-F 2002 41