Falconbridge, a low-cost metals producer with CAD2.61 billion (USD1.69 billion) in revenues, has entered three interest-rate swap agreements to convert a fixed-rate obligation into a floating-rate liability, according to Dean Chambers, treasurer. The rate swaps come on the back of a USD250 million fixed-rate bond the company recently sold. "We have a bias toward floating because it is generally the lowest cost of funds," he said. Also, he said the cash was raised to pay down a floating-rate commercial paper obligation so it made sense to replace that with another floating-rate obligation that could be created via swaps.
Chambers added that given the industry Falconbridge is in, it tends to prefer floating-rate liabilities. "Commodities are a factor in inflation and inflation is a factor in interest rates," he said, referring to the correlation between the three. However, he noted that other factors also obviously affect rate movements. "I don't want to overemphasize that, but you would theoretically expect that when you have high rates, it would be in an environment where base metals have high prices," he said. As a result, he sees floating-rate obligations as a natural hedge.
The mining company entered three swaps: two for USD100 million each and another for USD50 million, with three banks, but Chambers declined to name them. Merrill Lynch led the company's bond deal but did not get the swap business, he said. In the swaps, which match the deal's 10-year maturity the company receives the 7.35% coupon on the deal and pays a spread over six-month LIBOR which Chambers declined to reveal. Falconbridge selects derivatives counterparties based on price and from among its relationship banks.
Falconbridge uses swaps and swaptions as well as foreign exchange forwards and options to hedge interest-rate and currency risk. It does not use credit derivatives and has no plans to do so. Moody's Investors Service rates the mining company Baa3 and Standard & Poor's rates it BBB minus.
