United Utilities has entered a cross-currency interest rate swap on a recent JPY3 billion (USD25.4 million) bond offering and plans to tap the capital markets for GPB500 million to GBP1 billion this year, on which it will enter interest rate swaps. Tom Fallon, treasurer in Warrington, U.K., said the company always uses interest rate swaps to convert fixed-rate debt into floating rate, because it is a better liability match for its income, which is generated from regulated monopolies and is indexed to inflation.
The swap is part of a reverse enquiry from a Japanese investor and was executed to reduce the company's funding costs, Fallon said. He explained that United Utilities posts a target funding rate--which he would not disclose--to its dealer group and other relationship banks and then accepts reverse enquiries to achieve that level.
In the swap, United is paying sterling LIBOR plus a spread and receiving the 0.705% coupon in yen. The exchange rate for the swap is based on the JPY196 spot level for the currency pair at the time of the offering. United Utilities will issue bonds in foreign currencies and convert them into sterling-denominated obligations when there is specific investor interest, he added.
Fallon declined to disclose the counterparty on the swap. Dresdner Kleinwort Wasserstein was the underwriter on the bond offering. Fallon also declined to disclose the company's minimum credit rating for swap counterparties.
