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Derivatives

Realty Firm Takes USD1.5 Million Hit On I-Rate Hedge

U.S. realtor the Federal Realty Investment Trust has suffered a USD1.5 million loss on an interest rate hedge the firm entered on the back of a planned note sale, which was then delayed because of a fire at one of its properties. Andrew Blocher, v.p. in investor relations and capital markets at the firm in Rockville, Md., said the loss is now being amortized into the expense of the delayed issue. The firm issued the bond this month having originally scheduled the issue for August.

In the firm's 10-Q filing with the Securities and Exchange Commission at the end of last month, Federal Realty explained it entered a Treasury lock that fixed the benchmark five year Treasury rate at 3.472% between Aug.1-19. This transaction was to act as a hedge for a USD150 million senior unsecured note, underwritten by Wachovia Securities, Merrill Lynch and Salomon Smith Barney. Salomon was also the counterparty to the swap. On Aug. 16, the senior unsecured notes were priced with a scheduled closing date of Aug. 21 and the associated rate lock was closed. However as five-year Treasury rates declined during the pricing period Federal Realty was required to pay USD1.5 million to settle the rate lock.

Blocher said the fire came at a very unfortunate time for Federal Realty. If the note issue had gone ahead in August, the loss on the coupon compared with the market rate would have been reflected in the issue. However, this experience will not discourage the firm from executing interest rate swaps on any future issues, he said.

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