Noranda, a Canadian metals producer with approximately USD4 billion in sales last year, is considering entering an interest-rate swap on the back of a recent bond deal to convert a fixed-rate liability into a floating-rate one. Michael Frilegh, v.p., treasurer in Toronto, said he would like to enter a swap where the company would pay floating and receive fixed. However, with yields on Treasuries and swaps so low, he is preferring to keep the liability in fixed-rate for now and may enter a swap in the coming months if rates increase.
For example, Frilegh said the company would be receiving only about 5.2% in a fixed-rate swap, with current 10-year Treasuries now yielding around 4.7% and swap spreads at 50-60 basis points. Noranda sold the USD300 million 10-year transaction at 7.25%. As a result, he is waiting until rates rise and Noranda can enter a swap at a more favorable rate. "I don't imagine the 10-year swap rate will climb as high as 7%, but I do anticipate that over the 10-year life both Treasury yields and swap spreads will be at higher rates," he said. However, he does not have a specific threshold past which he would enter a swap.
Noranda prefers to keep its obligations in floating-rate because of the correlation between commodity prices and interest rates. "Having floating-rate debt allows us to pay higher rates when we're earning a higher revenue, while we can afford it, and when prices are depressed our rates are, too," he explained. The company selects derivatives counterparties from among its relationship banks on a competitive basis and as a means of rewarding them.
The company also uses foreign exchange options and some commodity options to hedge itself against price movements in its refining and smelting business. "Except for that we don't hedge on the commodity side, because we feel our shareholders want exposure to commodity prices," Frilegh said.
Moody's Investors Service rates Noranda Ba3 and Standard & Poor's rates it BBB minus.
