Northern Rock, a U.K.-based lending and savings bank, entered a cross-currency swap on a recent EUR600 million (USD634.89 million) bond offering to convert it into a sterling-denominated floating-rate liability. Pete Horner, head of derivatives in Newcastle-Upon-Tyne, U.K., said the bank converts all of its fixed-rate debt into floating-rate and all non-sterling denominated issues into sterling to match its asset base. The maturity of the swap matches the maturity of the bond.
In the swap, Northern Rock is paying LIBOR plus a spread in sterling and receiving the 3.875% fixed-rate coupon on the bond in euros. Barclays and UBS Warburg lead managed the bond, but Horner declined to comment on which firms executed the swap.
The bank uses several criteria to select a derivatives counterparty, including credit rating, price and banking relationship with Northern Rock. Traditionally the bank had a minimum credit rating for counterparties of AA, but Horner said that because of downgrades in the banking sector, this is no longer the case. But to counterbalance this, over the past six months Northern Rock has been increasing the number of collateral support annexes it has in place with counterparties.
