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U.K. Utility Looks To Convert Fixed-Rate Bond

Southern Electric is looking to enter an interest-rate swap to convert a 30-year GBP250 million (USD352 million) fixed coupon bond it issued last month into a synthetic floating-rate liability. The utility is looking to enter a swap in which it receives a fixed rate equal to the 5.50% coupon on the bond and pays a floating rate of less than 50 basis points below LIBOR, for more than half of the principal. Gregor Alexander, group treasurer of parent company Scottish and Southern Energy in Perth, U.K., said the company should be able to achieve such a rate through the use of a structured swap, such as a callable structure. He declined further comment about what other types of structured swaps the issuer is considering.

Alexander added the company wants to take out a five-year swap to match fixed-rate contracts it has that expire within the next five years. The swap will be used to lower the company's proportion of fixed-rate outstanding debt to 75-80%. He said SSE is comfortable with the rather high level of fixed-rate debt. "I'm very happy sitting there with a 30-year bond at 5.50%, which is why we're only looking to float out for five years," Alexander said. The proceeds will be kept in sterling because of the company's predominantly local cost base.

Royal Bank of Scotland and UBS Warburg acted as bookrunners on the sterling deal but Alexander said the company will not necessarily execute the swap with those firms. Southern Electric took advantage of investor demand and the parent company's high rating prompted quick execution of the sale. As a result, "the sale was accelerated and we decided we would wait to do the swap," Alexander said. Proceeds from the latest deal will be used to refinance a GBP150 million bond that expires in March and for general corporate purposes. Scottish and Southern is rated Aa3 by Moody's Investors Service and AA minus by Standard & Poor's.

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