Germany-based heavy industrial group Thyssenkrupp has entered into USD600 million (notional) of interest-rate swaps to hedge a series of floating rate loans against possible U.S. interest rate hikes. Rainer Verhoeven, junior treasury manager in Düsseldorf, said the five-to-eight year swap-rate is now below the company's funding rate so it has decided to enter swaps to hedge the $800 million in loans. He declined to reveal the company's funding rate.
Thyssenkrupp receives three-month U.S. dollar LIBOR in the swaps and pays an average fixed rate of 5.4%. It entered several swaps to mirror the maturity on the loans it had entered. The maturity on the loans range from five to eight years. Three-month U.S. dollar LIBOR was 5.02% on Wednesday. Thyssenkrupp entered plain-vanilla swaps rather than interest-rate caps because a plain-vanilla swap has favorable accounting treatment under FAS133. Although Thyssenkrupp is a German company it aims to list on The New York Stock Exchange within the next couple of years and therefore must use U.S. accounting rules to facilitate the listing.
The company decided against hedging the full USD800 million loan to allow it to participate if rates fall. The floating rates are 10 basis points-50bps over U.S. dollar LIBOR. Thyssenkrupp decided against hedging the loans when it arranged them in 1999 because it predicted interest rates would fall. Thyssenkrupp took out the loans to buy Dover Elevator of the U.S.
Verhoeven said it used the same banks for the swaps as it had used for the loans. These are major international and German banks, such as Deutsche Bank, Dresdner Bank and Commerzbank.
Thyssenkrupp had sales of EUR37 billion in the financial year of 1999/2000.
