BNP Paribas, Credit Suisse First Boston, Morgan Stanley Dean Witter and Schroder Salomon Smith Barney reportedly riled up the euro swaps market last week as they prepared for a USD7-8 billion France Telecom bond issue they are lead managing. Some USD3 billion (notional) traded in the euro swaps market last week as the lead managers positioned themselves for France Telecom potentially wishing to hedge and proprietary traders attempted to front run the positions, according to a trader.
The largest tranche of the bond issue will be a fixed-rate dollar-denominated bullet, which the telecoms company is expected to convert to floating euro via a swap. Therefore banks were lining up to enter swaps in which they pay floating euros and receiving floating dollars.
The euro rate paid by the banks increased over the course of the week from three-month Euribor minus 4.25 basis points to three-month Euribor minus 3bps in the six to 10- year sector. The 30-year sector rose as well. The banks receive three-month U.S. dollar LIBOR flat. Three-month Euribor was 4.7% Wednesday and three-month dollar LIBOR was 5.23% on Wednesday.
The lead banks entered basis swaps rather than cross-currency interest-rate swaps because they finance themselves at floating rates. Press officers at France Telecom did not return calls. Traders at the four lead managers declined to comment.
