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Polish Energy Corp. Enters Cross-Currency I-Rate Swap

Polish Oil and Gas Co. (PGNiG) has entered into a cross-currency interest-rate swap on the back of a recent EUR800 million (USD716 million) fixed-rate bond offering, Poland's largest ever corporate issue. Wojciech Szelagowski, deputy director of the economic department in Warsaw, said the company has agreed to enter the swap with ABN AMRO, which led the bond offering. He declined to say how much of the principal of the bond it will convert. An interest-rate derivatives official at ABN AMRO declined to comment on the transaction.

In the first part of the swap, the power company receives the 6.75% coupon of the bond in euros and pays a fixed rate of less than 11% in zlotys, according to Szelagowski. The high rate in zlotys versus euros reflects the different interest rates of the regions. The National Bank of Poland's short-term rates are 13.5%, compared to 3.75% for the European Central Bank, according to an economist at ING Barings in Warsaw.

That swap will last for three years. From that point on, PGNiG will pay a lower fixed rate to ABN on 50% of the remaining coupon and the remainder will be in floating-rate zlotys. The floating rate will be approximately 380 basis points below three-month WIBOR, which was at 13.8% last Wednesday. Szelagowski said the company is taking on the floating-rate risk because it expects Polish rates will be materially lower in three years as the country moves toward European Union and monetary union membership. It has entered the first stage of the swap because it wants to pay its liabilities in zlotys. Market observers said Poland could be included in the euro by 2004.

Szelagowski said ABN AMRO was picked because it offered the cheapest all-in package. PGNiG is rated BBB by Standard & Poor's and Baa3 by Moody's Investors Service.

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