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Derivatives

Telecoms Co. To Make First Derivatives Call

Stamford, Conn.-based Citizens Communications plans to tap the interest-rate derivatives market for its first use of any type of derivatives. Don Armour, treasurer and v.p. of finance, said the company has recently started discussions with several investment banks about entering fixed to floating interest-rate swaps to hedge interest-rate risk on part of its USD4.25 billion debt portfolio. About USD3.5 billion of the debt was raised over the last eight months through two separate bond offerings of USD1.75 billion each. He declined to name the banks.

"We haven't made any final conclusions as to when we might do this. We're currently evaluating our balance sheet to see where this might fit in," Armour said. He added that raising the money was crucial for the company. Entering an interest-rate swap agreement would be a way to fine tune its balance sheet, which is largely fixed interest-rate. Armour said the goal is for the company to manage its risk, while adhering to the Financial Accounting Standards Board's accounting rule 133. This requires corporates to report derivatives transactions on their balance sheets (DW, 7/22). Citizens has not developed criteria for deciding on counterparties or set into place a particular swap program that would determine the number of swaps or whether their maturity would match that of the company's recent bond issues. "It's going to be a matter of how we want to manage our balance sheet," said Armour.

Citizens came to market in May with a USD1.75 billion note offering, consisting of USD700 million of 8.5% notes due in 2006 and USD1.5 billion of 9.25% notes due in 2011. It tapped the market with a second USD1.75 billion offering in mid-August, composed of USD300 million of 6.375% notes due in 2004 and USD700 million of 9% notes due in 2031 and USD750 million of 7.625% notes due in 2008. The proceeds were used to refinance outstanding bank debt. Standard & Poor's rates Citizens' senior unsecured debt triple B.