A port commission in Washington state has entered into an interest-rate swap with two firms to hedge exposure to rate changes on a USD100 million floating-rate bond issue planned for next year. Morgan Stanley and Lehman Brothers competed to become the Port of Tacoma Commission's counterparty in the 30-year swap, said Jeff Smith, the commission's finance director.
Morgan Stanley won by offering to receive from the commission a fixed-rate of 3.795% in the swap. The agency decided to extend 30% of the contract to the runner up, because both firms worked hard to sort the contract, Smith said. Lehman accepted the offer, and will also receive a fixed-rate of 3.795% on 30% of the swap. In return, Morgan Stanley and Lehman will pay the commission 70% of one-month LIBOR, equivalent to the floating-rate of the 2006 bond issue. "We think this is the most efficient way to get an interest rate lock on the bonds," Smith said, noting the swap was written using the International Swaps and Derivatives Association master agreement.
