Costco Wholesale has entered an interest-rate swap following its recent USD300 million five-year bond offering to bring its floating-rate debt closer to its target of 40%. Before implementing the swap, Costco had approximately 78% in fixed-rate debt and 22% in floating-rate; after the swap, its floating-rate debt totals 36%. Hal Kaplan, treasurer, added that a portion of the proceeds of the bond offering will be kept in short-term investments--earning a floating rate of interest--and the swap will act as a hedge for that portfolio.
In the swap, Costco receives a fixed rate of 5.5% and pays six-month LIBOR minus 28 basis points in arrears. Kaplan said the company received a discount of 42bps for paying the swap in arrears and will make its first payment on Sept. 15, instead of Mar. 15, making the last payment on Mar. 15, 2007, six months after the bond matures.
It is paying the swap in arrears because it thinks the market is too bearish on the short-term interest rate environment. "We see the economic recovery as being slower than what is priced into the market," Kaplan said.
Bank of America, Credit Suisse First Boston, BancOne and Wachovia were the swap counterparties. BofA and CSFB co-led the bond offering and BancOne and Wachovia were co-managers on the deal.