Royal Bank of Scotland has entered an interest-rate swap with Morgan Stanley on the back of a EUR500 million (USD452 million) bond as part of its regular funding process in the European market. Sanjay Sofat, treasury manager in London, said the company entered the 12-year swap to convert the fixed-rate bond into a floating-rate liability. In the swap, RBS will pay a spread over six-month Euribor and receive 6%, matching the coupon of the bond offering. A Morgan Stanley interest-rate official confirmed it entered the swap but declined further comment.
Sofat declined to specify the exact spread RBS will pay, but said it is less than 55 basis points, because above that "it would have been too expensive for us to do it and we would have thought about keeping the coupon as fixed." The 6% coupon 12-year maturity and notional value of EUR500 million match the profile of the bond, which was an addition to a EUR1 billion bond RBS brought to market in May. The proceeds from that transaction and the more recent one will be kept in euros, Sofat said. "We have balance sheet positions on the other side, so balance sheet-wise, there's no reason to go back into floating sterling," he noted. "If there is an advantage to going back into sterling, we will consider [entering a currency swap], but otherwise we tend to keep it in the issuing currency," he added.
The firm's target all-in funding rate for this deal was in the area of the low 50s over six-month Euribor, Sofat said, adding that Morgan Stanley came with an offer "that ticked all our boxes." He estimated it would have cost RBS (AA/Aa2) an additional four or five basis points had it done the swap separately from the bond. Sofat said the bank's relationship with Morgan Stanley and its distribution also contributed to the selection. "Obviously we have the in-house capacity, but we like to have a feel of which way the market is going and it keeps everyone honest," he added. Sofat stressed the bank side of the company only tends to use plain-vanilla interest-rate and foreign exchange swaps and does not take punts on the market. He added RBS will likely not come back to the debt market for the remainder of the year.