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Derivatives

Canadian Telco Looks To Unwind Swaps

GT Group Telecom, a local telephone exchange carrier, is considering unwinding some of its foreign exchange swaps as a way to raise capital, according to a company official in Toronto. The move is an opportunistic play to capitalize on the exchange rate moving in favor of the Canadian telco. "We've been looking at this for awhile now. We're still not certain which swaps will be unwound but there is a strong likelihood that something will be pulled off within the next three months," the official added. The company's swap portfolio is relatively small and it is only looking to unwind a portion to test the waters before possibly unwinding the entire portfolio, the official said. He declined to be more specific about the exact size and exactly how much it is looking to unwind.

One of the company's options is to unwind a 10-year swap it completed in 2000 shortly following its initial public offering. The swap was executed on the back of a USD450 million 13.25% note offering in January 2000. It was put on when the exchange rate was hovering around CAD1.44 and the Canadian dollar has now weakened to CAD1.5765, according to the official. The plan would be for the company to sell the original swap back to the counterparty and enter a new swap at the CAD1.5765 exchange rate. The GT official declined to comment on which counterparties it used for the first transaction. An analyst who follows the company estimated that unwinding the swap should free up about USD20 million for GT Group Telecom.

"They're just looking at a portion of their debt. Unwinding the swaps is an ideal way for GT to offset their entire annual burn rate. It allows them to say to investors we started the year with USD650 million in liquidity and we're exiting with the same amount," said the analyst.

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