BT 2007 Annual Report Download - page 129

33. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT continued
Credit risk management
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. Where multiple transactions are
undertaken with a single counterparty, or group of related counterparties, the group may enter into a netting arrangement to
reduce the group’s exposure to credit risk. Currently the group makes use of standard International Swaps and Derivative Association
(ISDA) documentation. In addition, where the group has a legal right of set off and the ability and intention to settle net, the
relevant assets and liabilities are netted within the balance sheet. The group seeks collateral or other security where it is considered
necessary.
The maximum credit risk exposure of the group’s financial assets at 31 March 2007 and 31 March 2006 is represented by the
amounts reported under the corresponding balance sheet headings.
Liquidity risk management
The group ensures its liquidity is maintained by entering into long and short term financial instruments to support operational and
other funding requirements. The group’s liquidity and funding management process includes projecting cash flows and considering
the level of liquid assets in relation thereto, monitoring balance sheet liquidity and maintaining a diverse range of funding sources
and back-up facilities. Liquid assets surplus to immediate operating requirements of the group are generally invested and managed
by the centralised treasury function. Requirements of group companies for operating finance are met whenever possible from central
resources. The group manages liquidity risk by maintaining adequate committed borrowing facilities. During the year the group
utilised its commercial paper programme which was supported by a committed borrowing facility of up to £1,500 million (2006:
£1,500 million). The facility is available for a period of five years. The group had additional committed borrowing facilities of £2,035
million (2006: £35 million). This amount includes a facility of £2,000 million (2006: £nil) and is available for one year with an
extension option for a future year. Refinancing risk is managed by limiting the amount of borrowing that matures within any
specified period.
Price risk management
The group has limited exposure to equity securities price risk on investments held by the group.
Hedging activities
The group entered into a combination of interest rate and cross currency swaps designated as a combination of fair value and cash
flow hedges in order to hedge certain risks associated with the group’s US dollar and euro borrowings. The risks being hedged
consist of currency cash flows associated with future interest and principal payments and the fair value risk of certain elements of
borrowings arising from fluctuations in currency rates and interest rates.
At 31 March 2007, the group had outstanding interest rate swap agreements in cash flow hedges against borrowings with a total
notional principal amount of £3.2 billion (2006: £3.2 billion). The fair value of these interest rate swaps at the balance sheet date
comprised assets of £15 million and liabilities of £234 million (2006: £405 million). The interest rate swaps have a remaining term
ranging from four to 24 years (2006: four to 25 years) to match the underlying hedged cash flows arising on the borrowings
consisting of annual and semi-annual interest payments. The interest receivable under these swap contracts are at a weighted
average rate of 5.5% (2006: 4.6%) and interest payable are at a weighted average rate of 5.9% (2006: 5.9%).
At 31 March 2007, the group had outstanding cross currency swap agreements in cash flow and fair value hedges against
borrowings with a total notional principal amount of £4.8 billion (2006: £4.8 billion). The fair value of these cross currency swaps at
the balance sheet date comprised assets of £10 million (2006: £32 million) and liabilities of £833 million (2006: £433 million). The
cross currency swaps have a remaining term ranging from two months to 24 years (2006: one to 25 years) to match the underlying
hedged borrowings consisting of annual and semi-annual interest payments and the repayment of principal amounts. The interest
receivable under these swap contracts are at a weighted average rate of 6.9% (2006: 6.9%) for euro cross currency swaps and 8.2%
(2006: 8.2%) for dollar cross currency swaps and interest payable are at a weighted average rate of 9.2% (2006: 8.5%).
Forward currency contracts have been designated as cash flow hedges of currency cash flows associated with certain euro and US
dollar step up interest payments on bonds. At 31 March 2007, the group had outstanding forward currency contracts with a total
notional principal amount of £205 million (2006: £77 million). The fair value of the forward currency contracts at the balance sheet
date comprised an asset of £1 million (2006: £1 million) and had a remaining term of between three and 11 months (2006: three
and 11 months) after which they will be rolled into new contracts. The hedged interest cash flows arise on a semi-annual basis and
extend over a period of up to 24 years (2006: 12 years).
Forward currency contracts have been designated as cash flow hedges of currency cash flows associated with certain euro and US
dollar commercial paper issues. At 31 March 2007, the group had outstanding forward currency contracts with a total notional
principal amount of £760 million (2006: £434 million). The fair value of the forward currency contracts at the balance sheet date
comprised assets of £15 million (2006: £6 million) and had a remaining term of less than three months (2006: less than two
months) to match the cash flows on maturity of the underlying commercial paper.
Consolidated financial statements Notes to the consolidated financial statements
128 BT Group plc Annual Report & Form 20-F