Bank of Scotland has entered an interest-rate swap to convert a EUR1 billion (USD888 million) fixed-rate bond into a synthetic floating-rate liability. Richard Schrimpton, senior director of capital markets in London, said the bank entered the swap because floating-rate liabilities better fit the firm's overall interest-rate profile. However, Bank of Scotland came to market with a fixed rate bond to satisfy investors. "It was all about investor demand. We did a roadshow and they made it clear they preferred fixed," he said. He declined to elaborate on the reasoning except to say the proceeds will be used for the bank's recapitalization requirements following its recent merger with Halifax to create HBOS Group.
In the swap, Bank of Scotland will receive the 5.125% fixed-rate coupon on the bond and pay floating-rate liabilities to a handful of counterparties. The swap matches the 12-year tenor of the bond. He declined to detail terms of the swap or specify counterparties, although he said the bookrunners on the bond deal, BNP Paribas and UBS Warburg, were among those banks involved. An interest-rate derivatives trader at UBS confirmed the swap and a BNP swapper declined to comment.
Bank of Scotland is a commercial bank and does not have the in-house capacity to convert the deal and hedge it out in the market itself, though Schrimpton added the bank has become a more active end-user of interest-rate and foreign exchange swaps in the last year as part of its risk management program. The proceeds from the deal will be kept in euros. Schrimpton declined further comment.
Moody's Investors Service rates Bank of Scotland Aa2 and Standard & Poor's rates it AA.
