Apache Corporation, an oil and gas exploration and production company with an USD8 billion market cap, is considering entering its first interest-rate swap.Matt Dundrea, treasurer in Houston, said the company would enter the swap to increase the portion of floating-rate debt in its portfolio to take advantage of a steep yield curve.
Historically, Apache has maintained 25-50% of its outstanding debt as floating rate by issuing commercial paper. Recently, however, its proportion of floating-rate debt has fallen to 28% as a result of paying down short-term debt and its recent fixed-rate USD400 million bond offering. If Apache continues to pay down short-term debt and its floating-rate debt percentage drops below 25%, it would enter a swap regardless of the steepness of the yield curve.
Dundrea said the company is interested in the potential cost savings it could achieve due to the steepness of the yield curve. "It could potentially become even steeper," Dundrea added. Apache would receive long-dated and pay short-dated swaps, which would synthetically reduce its interest expense because of the disparity between long- and short-dated spreads. A counterparty to this trade would be betting the economy is going to recover and banks would hike interest rates, causing the short-end to rise and flattening the curve. This is the synthetic equivalent of buying long-dated bonds and selling short-dated bonds.
Apache has approximately USD2.25 billion in outstanding debt and would look to execute swaps in USD100 million pieces. If it goes ahead with the strategy it will convert a total of USD400 million, Dundrea said. The company has existing relationships with most of the top-tier U.S. and international banks and would look to one of them to be the counterparty in a potential transaction, he said. Price would be the final determinate.
