Colonial Pipeline, an interstate transporter of energy products with USD1.2 billion in total debt, is planning to enter an interest rate swap to convert part of an outstanding fixed-rate bond into a variable-rate liability. Craig Nunez, treasurer in Alpharetta, Ga., said the company is looking to take the USD50 million piece of fixed-rate it has remaining from a USD150 million note issue due in 2007 and convert the principal into a floater.
The impetus for the swap, follows Colonial's 30-year USD185 million bond issue last month. A portion of this latest offering--USD60 million--is being used to pay off floating-rate commercial paper, and Nunez said the company wants to enter a swap for a similar amount to keep up its levels of floating-rate debt. It will convert the outstanding five-year paper into a floater because it is shorter term and the company is concerned about hedge accounting and does not want to enter any long-term swaps.
The outstanding five-year paper was priced with a 7.45% coupon and Nunez said Colonial would look to receive this and pay the current market rate of 350 basis points over six-month LIBOR. "Our philosophy is to be interest-rate neutral," he said.
However, Nunez added the company is conservative when it comes to playing with rates and stressed its main priority is liquidity and not interest-rate management. After the expected swap, fixed-rate will account for about 80% of total debt. Colonial will select counterparties from among its bank group as a reward for other business, Nunez said, declining to elaborate.