Why would a company hedge its fixed-rate bond issue?

Maybe I learned this, but its been forgotten now.

A company issued $400,000,000 of 10 year bonds at a fixed rate. I noticed on the 10-k the firm has a large interest rate hedge on it. Why would they do this?

My guess is they have to mark the long term debt on their balance sheet at fair market value? But to me that doesn’t make sense. You already issued it and got the money - you are obligated to pay the par value back in 10 years. Why does it matter what it is pricing at in the secondary market?

They noted “we entered into interest rate swaps with a notional amount of $210.0 million to hedge against changes in the fair value of a portion of our ten-year bonds due in 2015”.

Guess I just need a refresher on “fair value hedging”. Feeling confused and stupid for not knowing this cold.

Sounds like the company is taking a position on interest rates and are just claiming it’s a hedge. It’s only a hedge from a temporary accounting situation. In reality, it’s swapping out to floating and taking on more interest rate risk. Which is fine, and probably a wise idea, but I struggle with calling it a “fair value hedge.”

I’d be happy to be proven wrong here though.

Thats what I thought - they would be taking more risk by converting part of their interest rate payments to floating. Doesn’t make sense to me in this low rate environment, my thought is it is a bad idea. They just refinanced last year from 7.0% to 6.0% on some of their debt. Fixed sounds like a good deal to me.

Would it have more to do with marking the bonds at FV on the balance sheet & avoiding any fluctiation there?

i think they’re hedging their rollover risk. if they issue at 6% today and need to rollover at 12%, the interest rate hedge will soothe some of the impact that the future increase in interest has on their business.

They entered a swap. That does nothing for rollover risk.

Aren’t they just hedging against further interest rate decreases? If rates go even lower, the market value of their liability goes up so they enter into a swap to receive floating which will pay off if rates go down further.

Plus they probably cannot call the bond until 2015 if rates go down so they need to hedge until they can call the bonds (if rates continue to go down).

Yeah this was my thought - it just doesn’t make sense to me why they have to mark their debt to market - especially if it is not callable. You aren’t going to buy more when the bonds mature - what is the point of market it there now?

Doesn’t make sense to me. Rates are at all times low, why would you want to get rid of those locked in low rates by swapping for floating?


Yeah, being a fixed rate issue, they are effectively creating a callable bond on an otherwise plain vanilla.