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Derivatives

EIB Executes Interest-Rate Hedge

The European Investment Bank has entered an interest-rate swap on a GBP150 million (USD216 million) bond it issued earlier this month to hedge the interest-rate risk. The swap converts the fixed-rate proceeds from the two-year bond deal to floating-rate liabilities, according to an official in the capital markets group in Luxembourg. The development bank issued another fixed-rate deal at the same time--a four-year GBP150 million bond--for which it does not plan to enter a swap.

The bank's general policy is to hedge interest-rate risk, except in cases where fixed-rate deals are similar to specific loan requirements. "If it matches, we can leave it unswapped, but otherwise we have to hedge ourselves against interest-rate risk, and this is quite clear," said the official. The proceeds will be left in sterling.

In the two-year swap, the EIB will receive the 6% coupon on the bond and pay a floating rate of approximately 20 basis points below three-month LIBOR. J.P. Morgan underwrote the bond and although the official declined to name the counterparty for the swap, he did say it is often the same bank involved in the debt issue. The deal was done as part of the EIB's annual issuance in sterling, which last year totaled GBP4 billion.

Moody's Investors Service and Standard & Poor's rate the development bank AAA.

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