BT 2012 Annual Report Download - page 148

Financial statements
Notes to the consolidated financial statements
26. Financial instruments and risk management continued
Credit ratings
The group’s 2016 and 2030 bonds contain a covenant such that if the group’s credit rating were downgraded below A3 in the case of Moody’s or
below A– in the case of Standard & Poor’s (S&P), additional interest would accrue from the next coupon period at a rate of 0.25% for each ratings
category adjustment by each agency. Based on the total notional value of debt outstanding of £2.4bn at 31 March 2012, the group’s finance
expense would increase/decrease by approximately £12m a year if BT’s credit rating were to be downgraded/upgraded, respectively, by one credit
rating category by both agencies from the current ratings.
The group’s €600m 2014 bond attracts an additional 1.25% for a downgrade by one credit rating by either or both Moody’s and S&P below
Baa3/BBB-, respectively. This would result in an additional finance expense of approximately £6m a year.
At 31 March the group’s credit ratings were as detailed below:
2012 2011
At 31 March Rating Outlook Rating Outlook
Rating agency
Standard & Poor’s BBB Stable BBB– Positive
Moody’s Baa2 Stable Baa2 Stable
Foreign exchange risk management
Management policy
The purpose of the group’s foreign currency hedging activities is to protect the group from the risk that eventual future net inflows and net
outflows will be adversely affected by changes in exchange rates. The Board’s policy for foreign exchange risk management defines the type of
transactions which should normally be covered, including significant operational, funding and currency interest exposures, and the period over
which cover should extend for the different types of transactions. Short-term foreign exchange management is delegated to the treasury
operation whilst long-term foreign exchange management decisions require further approval from the Group Finance Director, Director Treasury,
Tax and Risk Management or the Treasurer who have been delegated such authority by the Board. The policy delegates authority to the Director
Treasury, Tax and Risk Management to take positions of up to £100m and for the Group Finance Director to take positions of up to £1bn.
Hedging strategy
A significant proportion of the group’s external revenue and costs arise within the UK and are denominated in Sterling. The group’s overseas
operations generally trade and are funded in their functional currency which limits their exposure to foreign exchange volatility. Foreign currency
borrowings used to finance the group’s operations have been predominantly swapped into Sterling using cross-currency swaps. At 31 March
foreign currency borrowings comprised:
2012 2011
At 31 March £m £m
Euro 3,341 3,361
US Dollar 3,543 2,966
Other 117
6,885 6,344
The currency profile of these borrowings after the impact of hedging is disclosed in note 24.
The group also enters into forward currency contracts to hedge foreign currency investments, interest expense, capital purchases and purchase
and sale commitments on a selective basis. The commitments hedged are principally denominated in US Dollar, Euro and Asia Pacific region
currencies. As a result, the group’s exposure to foreign currency arises mainly on its non-UK subsidiary investments and on residual currency
trading flows.
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