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Cardtronics’ ‘Swaps’ Head Off Interest Rate Fluctuation

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Cardtronics Inc. has entered into a series of agreements intended to stabilize the interest rates it pays on the $1.3 billion in constant vault cash it rents to stock the ATMs it owns.

To understand what the agreements mean, one should first know that Cardtronics operates two types of businesses, Chris Brewster, the Houston-based ATM deployer’s chief financial officer, tells ISO&Agent Weekly. Cardtronics owns or operates 52,900 ATMs.

In one business, the company sells ATMs to merchants who own one or a few convenience stores or other small businesses. For that business, merchants stock their machines with cash from the register, clear jammed bills and perform other minor maintenance. Cardtronics signs a contract with those merchants to connect them to card networks, and it steps in to help only when something major goes wrong with the machine.

In some cases, independent sales organizations may persuade the shopkeepers to sign up with Cardtronics.

With the major retail chains, however, Cardtronics owns the machines and performs or manages almost every aspect of their operation, Brewster says. Cardtronics rents the cash from major banks, armored car companies transport the money and load it into the machines, and accounts are settled electronically at the end of the day.

The interest Cardtronics pays on that cash–about $1.3 billion stacked in the machines at any given time–represents a significant expense. To keep the amount of that expense predictable and to avoid unanticipated fluctuations in the company’s profit and loss statement, Cardtronics enters into “rate-swap agreements” with financial institutions.

Rate-swap agreements can work differently in various markets, but with the swaps Cardtronics uses the company agrees to pay a fixed rate of interest, and the bank pledges to pay a variable rate of interest.

So on any given day, the interest rate is based on LIBOR (the London Interbank Offered Rate, which banks use when they lend funds to each other) plus a small percentage. Today, LIBOR comes to 0.25%, so the rate for renting funds might be LIBOR plus 2%, or a total of 2.25%.

To use an example Brewster provided, suppose that rate applies to a $100,000 floating-rate residential mortgage. At 0.25%, LIBOR would come to $250 a year. But if LIBOR increases to 1%, the liability increases to $1,000 annually.

“That could make it hard for the family to eat,” Brewster suggests.

To head off that kind of uncertainty, the two parties to an interest-rate swap hedge their bets.

Homeowners might agree to pay a fixed 1% LIBOR no matter where the actual rate falls. That means they would ante up $1,000 a year in any case. If LIBOR remained at 0.25, they would pay $750 that year for the piece of mind provided by the LIBOR ceiling.

But under that same agreement, the bank pays the homeowner the floating LIBOR rate. If LIBOR increases to 2%, the bank pays the homeowner $2,000. That cancels the increase, and the homeowner still pays $1,000 to the bank.

The going rates for swaps in their “very liquid” market are readily available to anyone interested in entering into them, Brewster notes.

“The judgment call we make is how much do we want to fix,” Brewster says. “Rates are probably as low as they’re likely to get. It seemed to be a good time to take action.”

For 2013, for example, Cardtronics recently increased the amount it is devoting to swaps from $750 million to $1 billion, reducing its weighted average fixed rate from 3.36% to 2.67%, according to a table of figures Cardtronics made available.

The company entered into somewhat similar agreements with roughly corresponding improvements in the protected interest rates through the year 2018, according to the table.

“You can think of it as interest-rate insurance,” Brewster says.

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