Volkswagen Financial Services has entered an interest-rate swap to hedge a EUR50 million (USD46.5 million) floating-rate loan taken out last week. Clement Denks, treasurer in Braunschweig, Germany, said in the three-year EUR50 million (notional) swap the financial division of the German-based car company pays a fixed rate of 4.67% and receives three-month Euribor. The interest rate on the three-year loan is a few basis points above three-month Euribor. Three-month Euribor was 4.65% on Wednesday.
Denks said Volkswagen Financial Services entered the swap on the loan because it is uncertain about the future direction of European interest rates. If there is a long-term slowdown in the U.S. economy, Europe may experience a similar slowdown and the European Central Bank may cut interest rates, he said. But if growth in the U.S. economy picks up again, interest rate cuts that have been already been priced into the market will be priced out, leading Euribor to rise. Denks declined comment on what proportion of the unit's loan book is hedged or the notional size of the swaps book.
Volkswagen Financial Services had assets of DEM19.6 billion (USD9.38 billion) in December 1999. Denks said it chooses counterparties based on credit quality and relationship.
