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.