Ferro Corp., a Cleveland-based conglomerate that produces plastics, chemicals, electronics and ceramics, is looking to make its first use of over-the-counter derivatives as part of an effort to lower its overall debt-to-capitalization ratio. Ferro, which averages some USD1.46 billion in annual revenue, is in discussions with investment banks about entering a fixed-to-floating interest-rate swap to convert the 9 1/2% fixed coupon on a recent USD200 million bond issue to a floating rate, according to a company official. The company is considering pulling the trigger on a swap within the next six months, he added.
Despite the likelihood that rates will rise over the medium term following the Federal Reserve's 11 rates cuts over the past year, the official said Ferro believes 30-year Treasury rates will remain within a "reasonable" range of their current rate of 5.40% over the next year. "We don't see Treasury rates rising more than 100 basis points. So based on that assumption, we're hoping to pay a floating rate that's lower than the current [bond] coupon. Even it's only slightly lower, we'll probably enter the swap," he noted.
Ferro has yet to decide on potential counterparties. A likely candidate could be Credit Suisse First Boston, which was the lead bookrunner on the bond offering. Officials at CSFB declined to comment. "We have a great relationship with Credit Suisse, but nothing has been decided when it comes to counterparties," the official noted. Right now, Ferro is concentrating on finding the best swap structure for the USD200 million bond offering. The maturity on the swap is likely to match that of the seven-year issue, the official added. Ferro is rated BBB- by Standard & Poor's and Baa3 by Moody's Investors Service.
