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British Utility Enters Rate Swap

04 Feb 2002

United Utilities Electricity, an electricity company in Northwest England, has entered an interest-rate swap on the back of a GBP100 million (USD142 million) bond it reopened late last month, to convert a fixed-rate sterling liability into a synthetic floater. Tom Fallon, treasurer in Warrington, U.K., said the utility entered the swap with Royal Bank of Scotland Financial Markets, which also underwrote the bond. An RBS official did not return calls.

The bond deal tapped a 30-year issue due in 2026 that was first sold in 1996. In the swap, the utility will receive the 8.875% coupon and pay a six-month LIBOR rate plus a basis point spread in the high 40s, Fallon said. The swap was done as part of the company's general risk management practices. The bond was sold at a more than 43% premium because of the high coupon, but Fallon said investors were still keen to participate. "What matters to us is the same that matters to investors, the internal rate of return on the cash flow and this is a very attractive rate for 24-year money," he said.

Fallon said United Utilities often uses interest-rate swaps and has used foreign exchange swaps in the past as part of U.S. dollar, euro and yen-denominated bond sales. It chooses counterparties from among its relationship banks.

Moody's Investors Service rates it A2 and Standard & Poor's has it at A minus with a positive outlook.

04 Feb 2002