BT 2012 Annual Report Download - page 147

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144 Financial statements
Notes to the consolidated financial statements
26. Financial instruments and risk management continued
Hedging strategy
In order to manage the group’s interest rate profile, the group has entered into cross-currency and interest rate swap agreements with commercial
banks and other institutions to vary the amounts and periods for which interest rates on borrowings are fixed. The duration of the swap
agreements matches the duration of the debt instruments. The majority of the group’s long-term borrowings have been, and are, subject to fixed
Sterling interest rates after applying the impact of these hedging instruments. Outstanding cross-currency and interest rate swaps at 31 March
2012 are detailed in the Hedging activities and Other derivatives section below.
The group’s fixed to floating interest rate profile, after hedging, on gross borrowings was:
2012 2011
Fixed Floating Fixed Floating
rate rate rate rate
interest interest Total interest interest Total
At 31 March £m £m £m £m £m £m
Total borrowingsa7,954 1,971 9,925 7,972 1,215 9,187
Ratio of fixed to floating 80% 20% 100% 87% 13% 100%
aSee note 24.
Sensitivities
Interest rates
The group is exposed to volatility in the income statement and shareholders’ equity arising from changes in interest rates. To demonstrate this
volatility, management have concluded that a 1% increase in interest rates and parallel shift in yield curves across Sterling, US Dollar and Euro
currencies is a reasonable benchmark for performing a sensitivity analysis.
After the impact of hedging, the group’s main exposure to interest rate volatility in the income statement arises from fair value movements on
certain derivatives not in hedge relationships, floating rate borrowings, investments and cash equivalents which are largely influenced by Sterling
interest rates. With all other factors remaining constant at 31 March 2012, a 1% increase in Sterling interest rates would increase the group’s
annual net finance expense by approximately £7m (2011: £2m).
The group’s main exposure to interest rate volatility within shareholders’ equity arises from fair value movements on derivatives held in the cash
flow reserve. The derivatives have an underlying interest exposure to Sterling, Euro and US Dollar rates. With all other factors remaining constant
and based on the composition of derivatives included in the cash flow reserve at the balance sheet date, a 1% increase in interest rates in each of
the currencies would impact equity, before tax, as detailed below:
2012 2011
£m £m
(Reduce) (Reduce)
At 31 March Increase Increase
Sterling interest rates 435 426
US Dollar interest rates (406) (355)
Euro interest rates (66) (94)
A 1% decrease in interest rates would have broadly the same impact in the opposite direction.
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