BT 2004 Annual Report Download - page 120

36. 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 financial 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 contained covenants that
if the group credit rating was downgraded below A3 in the case of Moody’s or below A minus in the case of 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 increased BT’s interest charge by approximately £32 million per annum. BT’s current credit
rating from S&P is A minus. Based upon the total debt of £9 billion outstanding on these instruments at
31 March 2004, BT’s annual interest charge would increase by approximately £45 million if BT’s credit ratings
were to be downgraded by one credit rating category by both agencies below a long-term debt rating of Baa1/A
minus. If BT’s credit rating with Moody’s was to be upgraded by one credit rating category the annual interest
charge would be reduced by approximately £23 million.
(d) Fair value of financial instruments
The following table shows the carrying amounts and fair values of the group’s financial instruments at 31 March
2004 and 2003. 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 financial 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
2004
£m
2003
£m
2004
£m
2003
£m
Non-derivatives:
Assets
Cash at bank and in hand 109 91 109 91
Short-term investments
a
5,117 6,311 5,117 6,319
Fixed asset investments
b
231 317 229 311
Liabilities
Short-term borrowings 2424
Long-term borrowings, excluding finance leases
c
11,800 15,966 13,506 17,720
Derivatives relating to investments and borrowings (net)
d
:
Assets –10 –229
Liabilities 748 –1,182 –
Derivative financial instruments held or issued to hedge the current
exposure on expected future transactions (net):
Assets –2–2
Liabilities ––––
a
The fair values 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 values of listed fixed asset investments were estimated based on quoted market prices for those investments.
c
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.
d
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.
BT Annual Report and Form 20-F 2004119 Notes to the financial statements