Northern Rock has entered an interest-rate swap to convert a GBP250 million (USD354 million) fixed-rate bond into a synthetic floating-rate obligation, according to an official in the treasury department in Newcastle, U.K. The building society issued in a fixed-rate as part of its regular funding to generate cash to fit its fixed-rate mortgage portfolios and fixed-rate savings products, he said. However, it is converting the proceeds to floating because it uses three-month LIBOR as a benchmark for risk management.
In the swap, the U.K. building society will pay a three-month LIBOR-based rate and receive the 5.75% coupon on the sterling-denominated bond it sold earlier this month, according to the official. He declined to reveal the rate it will pay or say whether the swap is for the entire size of the deal or its 15-year maturity.
Although Barclays Capital and Lehman Brothers underwrote the bond deal, he declined to say whether they acted as counterparties on the swap. "We have an active derivatives desk so we're capable of either going with the lead houses or hooking up swaps ourselves," he noted.
Moody's Investors Service rates Northern Rock A2, while Standard & Poor's has it at A.
