John Q. Hammons Hotels, an owner and developer of upscale hotels across the U.S., is considering entering its first interest-rate swap to convert a recent USD510 million fixed-rate bond offering into a floating-rate obligation. Paul Muellner, cfo in Springfield, Mo., said the transaction would be its first use of over-the-counter derivatives. "We've thought a lot about it and are still working on it and with LIBOR being as low as it is, it would be nice to get [the company's interest obligation] somewhere down there," he said.
In any swap, the property company would seek to receive the fixed 8.875% coupon on the 10-year bond and pay a floating, LIBOR-based rate, for roughly half of the total deal size. The top-10 U.S. hotelier in terms of capacity, has approximately USD800 million in outstanding debt, USD510 million of which is in bonds. Muellner added, 90% of its debt is fixed rate.
However, Muellner noted that strict covenants on the deal may prevent the company from entering a swap to convert the liability. "In a perfect world, I would like to [enter a swap], but we're fairly inflexible in terms of what we can do in altering the basic structure of the transaction, and our attorneys are advising me it is not as straightforward as it might seem," he said, declining to be more specific.
The hotel chain wants to enter its first swap now because, in addition to low floating rates, it is becoming more savvy in terms of risk management, Muellner said. "We are becoming more aware of [interest-rate management], we've seen other people do it and it might work for us," he explained.
As for potential counterparties, Muellner said the deal's lead manager, Lehman Brothers, has broached the idea and it would also consider entering a swap with other large banks based on favorable terms. Buddy Robinson, head of U.S. dollar swaps trading at Lehman Brothers in New York, did not return calls.
Moody's Investors Service rates the hotel company B2 and Standard & Poor's rates it B.
