Italian Bank Enters Knock-Out Interest Rate Swap

  • 05 Feb 2001
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Italy's Crediop has entered a knock-out interest-rate swap to hedge half its exposure on a fixed rate EUR220 million loan it made two weeks ago. Crediop provides funding for local and municipal entities at fixed rates but secures floating rate financing to fund its lending program, according to Luca Lupori, derivatives trader in Rome. The bank decided to use a knock-out interest-rate swap because it was 10-15 basis points cheaper than a plain-vanilla swap, he said, adding that he believes there is little chance of it being knocked out. The Federal Reserve set the direction for future interest-rate movements with its 100bps rate cut last month, Lupori added.

In the 10-year swap the bank receives six-month Euribor and pays 4.9%. The swap knocks out if six-month Euribor reaches 5.75%. Six-month Euribor was 4.69% on Tuesday. The notional value of the swap is approximately EUR110 million (USD102 million). Lupori said the other half of the loan is hedged by existing interest-rate swaps. The loan was for EUR220 million and has a 15-year maturity. Crediop decided to hedge the 15-year loan with a 10-year swap because it has other swaps in its portfolio that will cover the remaining life of the loan. One reason for this is it may still have swaps in place after the loan they were hedging has been paid down early, Lupori explained. The interest-rate on the loan is 5.80%. Lupori declined to name the swap counterparty or the borrower.

Standard & Poor's rates Crediop double A minus and Moody's Investors Service rates it double-A2.

  • 05 Feb 2001

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