BT 2005 Annual Report Download - page 108

33. Financial instruments and risk management continued
The values of forward foreign currency contracts at 31 March 2005 were £427 million (2004 – £301 million) for
purchases of currency and £782 million (2004 – £1,223 million) for sales of currency. These values have been
estimated by calculating their present values using the market discount rates, appropriate to the terms of the
contracts, in effect at the balance sheet dates.
At 31 March 2005, the group had deferred unrealised gains of £2 million (2004 – £nil) and losses of £nil (2004 –
£5 million), based on dealer-quoted prices, from hedging purchase and sale commitments, and in addition had deferred
realised net losses of £5 million (2004 – £3 million gains). These are included in the profit and loss account as part of
the hedged purchase or sale transaction when it is recognised, or as gains or losses when a hedged transaction is no
longer expected to occur.
(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 2005, BT’s annual interest
charge would increase by approximately £26 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 £13 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 2005
and 2004. 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
2005
£m
2004
£m
2005
£m
2004
£m
Non-derivatives:
Assets
Cash at bank and in hand 206 109 206 109
Short-term investments
a
4,592 5,117 4,592 5,117
Fixed asset investments
b
13 231 13 229
Liabilities
Short-term borrowings 2222
Long-term borrowings, excluding finance leases
c
10,904 11,800 12,246 13,506
Derivatives relating to investments and borrowings (net)
d
:
Assets ––––
Liabilities 685 748 1,435 1,182
Derivative financial instruments held or issued to hedge the current
exposure on expected future transactions (net):
Assets ––––
Liabilities ––2–
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.
Notes to the financial statements BT Group plc Annual Report and Form 20-F 2005 107