BT 2010 Annual Report Download - page 142

FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
140 BT GROUP PLC ANNUAL REPORT & FORM 20-F
Operational management policy
The group’s credit policy for trading related financial assets is applied and managed by each of the lines of business to ensure compliance.
The policy requires that the creditworthiness and financial strength of customers is assessed at inception and on an ongoing basis.
Payment terms are set in accordance with industry standards. The group will also enhance credit protection when appropriate, taking into
consideration the customer’s exposure to the group, by applying processes which include netting and off setting, and requesting securities
such as deposits, guarantees and letters of credit. The group takes proactive steps to minimise the impact of adverse market conditions on
trading related financial assets. The concentration of credit risk for trading balances of the group is provided in note 17 which analyses
outstanding balances by line of business and reflects the nature of customers in each line of business.
Liquidity risk management
Management policy
The group ensures its liquidity is maintained by entering into short, medium and long-term financial instruments to support operational
and other funding requirements. On at least an annual basis the Board reviews and approves the maximum long-term funding of the
group and on an ongoing basis considers any related matters. Short and medium-term requirements are regularly reviewed and managed
by the treasury operation within the parameters of the policies set by the Board.
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. The Board
reviews forecasts, including cash flow forecasts, on a quarterly basis. The treasury operation reviews cash flows more frequently to assess
the short and medium-term requirements. These assessments ensure the group responds to possible future cash constraints in a timely
manner. Liquid assets surplus to the immediate operating requirements of the group are generally invested and managed by the
treasury operation. Requests from group companies for operating finance are met whenever possible from central resources.
Liquidity position
2010 2009 2008
At 31 March £m £m £m
Net debt 9,283 10,361 9,460
During 2010, the group’s net debt decreased from £10.4bn to £9.3bn primarily driven by higher free cash flow partially offset by the
pension deficit payment of £525m in December 2010. During 2010, debt amounting to £1bn matured consisting of £0.7bn of
commercial paper and £0.3bn of long-term debt. This was offset by new issuance of a €600m bond at 6.125% repayable in 2014 which
was swapped into £520m at a fixed semi-annual rate of 6.8%. During 2009, the group’s net debt increased from £9.5bn to £10.4bn
primarily driven by lower free cash flow being exceeded by dividend and share buy back payments. During 2009, debt amounting to
£0.9bn matured consisting of bank notes and Sterling floating notes. This was offset by new issuances of £1.5bn mainly consisting of a
€1bn bond at 6.5% repayable in 2015, which was swapped into £0.8bn at an average annualised Sterling interest rate of 7.7%, and
commercial paper. In addition, investments of £0.3bn matured.
During 2010 and 2009 the group issued commercial paper and held cash, cash equivalents and current asset investments in order to
manage short-term liquidity requirements. At 31 March 2010 the group had an undrawn committed borrowing facility of £1.5bn (2009:
£1.5bn). The facility is available for the period to January 2013. The group had an additional undrawn committed borrowing facility of
£900m which expired in March 2010.
Refinancing risk is managed by limiting the amount of borrowing that matures within any specified period and having appropriate
strategies in place to manage refinancing needs as they arise. The group has two significant term debt maturities during the 2011 financial
year. In December 2010 the group’s US Dollar 8.625% note matures with a principal of $2,883m (£1,742m at swapped rates) and in
February 2011 a Euro 7.375% note matures with a principal of €1,125m (£758m at swapped rates). The group has built up significant
liquidity in anticipation of these maturities which, alongside cash flows generated from operations and the group’s financing strategy, will
fund this requirement. In May 2010, the group entered into a £650m two-year facility arrangement. There are no term debt maturities in
the 2012 financial year. At 31 March 2010, the group’s credit rating was BBB– with stable outlook with S&P and Baa2 with negative
outlook with Moody’s respectively (2009: BBB with stable outlook/Baa2 with negative outlook).
32. Financial instruments and risk management continued