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Fantasia Foods
Pty Ltd

Fantasia Foods Pty Ltd is a proud Commonwealth Bank client of twenty five years. From their once family-operated supermarket, they’ve grown to be the largest independent supermarket proprietor in Victoria.

They have a number of facilities with the Bank including two Market Rate Loan (MRL) accounts totalling $30m (one for $10m and one for $20m), an overdraft for $500,000, car leases, merchant facilities and CommBiz.

The expiry date on their MRL facilities and an existing $10m hedge both expire in six months’ time. The current hedge is a Cap for $10m at 3%, which cost them an upfront premium of $95,000.

Click the Cap Solutions button to learn more.

Cap Solutions

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A capped rate loan is a solution that allows a borrower to remain at a Variable Market Rate, protecting them from interest rates rises above the specified Cap Rate.

If the Variable Market Rate is below the Cap Rate, Fantasia Foods pays the Variable Market Rate, but if the Variable Market Rate is at or above the Cap Rate, Fantasia Foods pay the Cap Rate.

For a more detailed description of the Cap Solution, including benefits, costs and risks, click the Cap Solution button.

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Cap solution

Description

  • A solution that allows a borrower to remain at a Variable Market Rate while being protected if interest rates rise above the specified Cap Rate.
  • If the Variable Market Rate is below the Cap Rate borrower pays the Variable Market Rate.
  • If the Variable Market Rate is at or above the Cap Rate, borrower pays the Cap Rate.

Benefits of Cap Solution

  • Protection from interest rates rising above a nominated Cap Rate, providing a known worst-case scenario.
  • Ability to retain the benefit of current low short-term rates with flexible repayments.
  • Potential to benefit if Variable Market Rate falls.
  • The Cap can accommodate various terms and repayment structures.

Costs and Risks of Cap Solution

  • There is a premium payable. Lower Cap Rates attract higher premiums. The Premium can be paid either in full up-front, or amortised at each reset for the term of the Cap (however this will attract a higher total premium).
  • If the Variable Market Rate does not exceed the Cap Rate during the term then a Cap can be more costly than fixed or variable alternatives.
  • If the Cap transaction is terminated early (prior to the maturity date), and the premium has not been paid in full, a termination cost may be incurred.

Further Considerations

  • A Cap will often have a value which can be realised by selling it back to the bank and this value is dependent on the Cap Rate, time to maturity and the market volatility. Any value would be offset by remaining premium payable.