Extendicare Health Services, an operator of more than 260 nursing homes in the U.S. and Canada, has entered an interest-rate swap with Lehman Brothers to convert an existing fixed-rate liability into floating-rate, said Mark Durishan, cfo in Milwaukee. Officials at Lehman declined comment.
The swap follows a USD150 million bond Extendicare issued late last month, with Lehman as its underwriter. However, Durishan said Extendicare entered a swap to convert an existing USD200 million, five-year fixed-rate chunk of debt that remained from a deal it issued in 1998 into floating, and will leave the recently issued USD150 million, eight year security as a fixed-rate liability. In the swap, the company will pay a spread over six-month LIBOR and receive the 9.6% coupon on the bond. "The difference between a five and an eight year swap wasn't enough bang for the buck with the way the yield curve is, so we swapped our existing debt," he explained, declining to quantify the difference or be more specific. Extendicare, which is not an active user of over-the-counter derivatives, entered the swap to achieve a mix of floating- and fixed-rate debt, which Durishan declined to reveal.
Durishan said the recent bond deal was issued to pay off floating-rate bank debt and so it made sense to convert either the company's existing debt or the new deal to a floater, and the existing debt proved to be a more attractive option. "I'm not smart enough to tell you which way interest rates will go. It's not like we pick a target--we admit we don't know and we try to keep balance [of fixed and floating]," he said.
The nursing home operator selected Lehman Brothers as its swap counterparty because of the bank's involvement in the bond deal, Durishan said, although he noted they were separate transactions. "We could have selected someone else, it was just mechanically easier," he said.
Moody's Investors Service rates Extendicare B2 and Standard & Poor's rates it B minus.
