SNCB, the Belgian railroad operator, has entered a 10-year exotic interest-rate swap to hedge itself against movements in six-month Euribor. Johan Verhoeven, head of back office at the treasury in Brussels, said the state-owned company often converts fixed-rate bond offerings into floating-rate liabilities and so wanted to go an extra step and hedge its floating-rate exposure. It entered the EUR75 million (USD66 million) notional swap with a German bank, which he declined to name.
The swap has different trigger levels that determine what SNCB pays, but it always receives six-month Euribor. For example, if six-month Euribor is between 7.25% and 8.75% SNCB pays 6.65%. If the floating-rate is between 3% and 3.5% SNCB will pay Euribor plus four times the difference between the rate and 3.5%. "Euribor is now 3.6% but if it increases in five or six years then we will have a certain fixed-rate to pay and it gives us upside protection where we pay a maximum level," Verhoeven said.
SNCB uses a variety of interest-rate and foreign exchange swaps to convert fixed-rate and foreign currency transactions into floating euros. The company selects counterparties based on price, however it only uses firms rated AA minus or higher. Standard & Poor's gives SNCB a AA plus rating and Moody's Investors Service has it at Aa1.
