A planned 10-year debt issue and market uncertainty regarding future interest-rate moves led Morristown, N.J.-based Honeywell to undertake a detailed study of interest-rate cycles over the past 60 years. This research revealed that the forward curve for the London interbank offered rate (Libor) tends to over-predict future rate cycles. The challenge was to benefit from these findings by increasing the $37 billion company’s floating-rate debt exposure to reduce its overall interest expense.
With an existing floating rate debt exposure of 13%, Honeywell undertook a peer group study and from that set 55% as its upper limit. It used scenario analysis on its $7.6 billion debt portfolio to assess how different levels of floating-rate debt would affect the company’s earnings per share over a 10-year period. As a result of the analysis, in the first quarter of 2011 Honeywell swapped its $800 million 10-year note to floating upon issuance. The swap was executed by Barclays, one of the bond’s three bookrunners.
Choosing a longer-tenor swap was a crucial aspect of the strategy since the Fed was expected to raise rates in the short term, meaning that a shorter-tenor swap might end up costing more than fixed-rate debt. “We knew that over the next 10 years we will probably go through another rate cycle,” comments Andrea Vasilevski, senior financial analyst at Honeywell.
Putting on the swap increased Honeywell’s floating-rate exposure from 13% to 21% and reduced the interest rate on the 10-year note, resulting in annualized savings of $27 million.
As part of the project, Honeywell now has a framework in place that will allow the company to benefit from similar opportunities in the future. “We assess the interest expense forecast monthly and monitor the markets daily,” Vasilevski says. “We want to make sure that we benefit from any opportunities.”