Safeway entered an interest-rate swap on the back of a recent GBP200 million (USD312.78 million) bond offering. In the swap the supermarket is paying approximately 76 basis points over LIBOR, and receiving the 5.875% coupon on the bond, said Miles Collins, director of corporate finance in London.
If the company had not converted the bond to floating-rate debt it would have pushed the fixed-rate portion of its outstanding portfolio--which totals GBP1.1 billion (USD1.72 billion)--to above 60%. Safeway targets an optimal percentage of 50% floating-rate debt, and will not tolerate that percentage falling below 40%, Collins explained.
Safeway approached HSBC and Credit Suisse First Boston with the request to enter the swap and chose them as counterparties because they were also the lead managers on the bond offering, Collins said. He added that Safeway has no specific requirements--such as credit rating--for potential counterparties, but uses its relationship banks on most transactions.
Safeway also uses cross-currency swaps when issuing bonds in currencies other than sterling. Most of its derivatives activity, however, is confined to plain vanilla interest-rate swaps and foreign exchange swaps as it is reasonably conservative, Collins said. The company has no further funding needs for the year, he added. Safeway is not affiliated with the U.S.-based Safeway Inc.
