BT 2011 Annual Report Download - page 146

143BT GROUP PLC ANNUAL REPORT & FORM 20-F 2011
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
29. Financial instruments and risk management continued
The credit quality and credit concentration of cash equivalents, current asset investments and derivative financial assets are detailed in the
tables below. Where the opinion of Moody’s and S&P differ, the lower rating is used.
Moody’s/S&P credit rating of counterparty
At 31 March 2011 Aaa/AAA Aa2/AA Aa3/AA– A1/A+ A2/A A3/A– Total
Cash equivalents – 18 159 32 1 – 210
Current asset investments – – – 7 12 – 19
Derivative financial assets – 52 115 378 188 – 733
– 70 274 417 201 – 962
Moody’s/S&P credit rating of counterparty
At 31 March 2010 Aaa/AAA Aa2/AA Aa3/AA– A1/A+ A2/A A3/A– Total
Cash equivalents 100 609 202 341 3 – 1,255
Current asset investments 258 – 35 105 8 – 406
Derivative financial assets – 89 480 708 318 105 1,700
358 698 717 1,154 329 105 3,361
The concentration of credit risk for trading balances of the group is provided in note 19, which analyses outstanding balances by line of
business and reflects the nature of customers in each line of business.
The derivative financial assets were held with 14 counterparties at 31 March 2011 (2010: 18 counterparties). After applying the legal right
of set-off under the group’s ISDA documentation, the group had a net exposure to derivative counterparties of £549m (2010: £1,303m) of
which 94% (2010: 85%) was with six counterparties (2010: six).
The group has credit support agreements with certain swap counterparties whereby on a weekly basis the fair value position on nominal
£800m of long dated cross currency swaps and interest rate swaps is collateralised. As at 31 March 2011, the group had paid cash collateral
of £14m (2010: £nil) in respect of fair value losses and had received cash collateral of £104m (2010: £nil) in respect of fair value gains. The
collateral paid and received is recognised within cash and cash equivalents, and loans and other borrowings, respectively.
The majority of the group’s derivatives are in designated cash flow hedges. With all other factors remaining constant and based on the
composition of net derivative financial assets at 31 March 2011, a 100 basis point shift in yield curves across each of the ratings categories
within which these derivative financial assets are classified would change their carrying values and impact equity, before tax, as follows:
Impact of 100 Impact of 100
basis point basis point
increase decrease
At 31 March 2011 £m £m
Moody’s/S&P credit rating
Aa2/AA (4) 5
Aa3/AA– (15) 20
A1/A+ (75) 88
A2/A (101) 120
(195) 233
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 group’s exposure to the customer, by applying processes which include netting and offsetting, and requesting securities
such as deposits, guarantees and letters of credit. The group takes proactive steps including constantly reviewing credit ratings of
relationship banks to minimise the impact of adverse market conditions on trading related financial assets.
Capital risk management
The objective of the group’s capital management policy is to reduce net debt over time whilst investing in the business, supporting the
pension scheme and paying progressive dividends. In order to meet this objective, the group may issue or repay debt, issue new shares,
repurchase shares, or adjust the amount of dividends paid to shareholders. The group manages the capital structure and makes adjustments
to it in the light of changes in economic conditions and the risk characteristics of the group. The Board regularly reviews the capital structure.
No changes were made to these objectives and processes during 2011 and 2010.
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