0
Skip to content
Exit

Early
engagement

James was very happy to be engaged early in the process. This allowed him to meet with the client to determine their current needs, and tailor a solution appropriate for their current requirements (pending the approval of the proposed facility term extension).

Click on each button to find out more.

The Global Markets Specialist was off to a good start with all the information you provided. Commsee revealed under the $10m Market Rate loan chevron that there was Interest Rate Risk Management (IRRM) on the account.

Involving the Global Markets Specialist as early as possible allows them to provide input into the CCL application you’ve prepared for the client.

Note: Make sure that you confirm the hedge details in Commsee with the Global Markets Specialist, as sometimes the hedge details are incomplete.

James, the Global Markets Specialist, is on a laptop

James reviewed Fantasia Foods’ current hedge. The company had $10m in debt that was put in place about two and a half years ago with a Cap Rate of 3%. They hedged the loan, paying an up-front of premium of $95,000.

They wanted the flexibility that a Cap Solution offered, with protection against rises above the 3% Cap Rate and the potential to benefit from falls in the interest rate. Taking into account the up-front premium, their effective rate would have been no more than 3.32%pa. Looking back, interest rates continued to fall over the period, to the benefit of Fantasia Foods.

Global Markets Specialist having a conversation with a client

Fantasia Foods wanted to compare a number of solutions: a Fixed Rate for $10m, starting in six months’ time; a fixed rate starting immediately; and the Cap Rate that could be offered under current market conditions at a cost of $9,500 per $1m, starting in six months’ time.

Global Markets Specialist having a conversation with a client

James presented Fantasia Foods with a Term paper detailing the various solutions so they could make an informed decision.

The client decided to wait for further local and international economic data to transpire before they made a decision. The Global markets specialist maintained regular contact with the client, providing them with markets updates, reassessing their client needs and providing them with updated pricing on the Interest Rate Risk Management solutions they wished to consider.

Six months later, Fantasia Foods felt the time was right to enter into an Interest Rate Risk Management solution for part of their debt, and they chose a two-year Fixed Rate solution for $10m.

Click the Fixed Rate button to learn more.

dialog start

Fixed Rate

Description

  • Client pays the Fixed Rate during the fixed term irrespective of the Variable Market Rate.
  • A Fixed Rate locks in a known cost of funding for a chosen period of time.

Benefits of Fixed Rate Solution

  • Protection against future increase in variable interest rates above the Fixed Rate during the fixed term.
  • Known cost of funding over a fixed term.
  • Forward starts available (the Fixed Rate can be locked on any given day to commence on a future date).

Costs and Risks of Fixed Rate Solution

  • Usually involves an immediate increase in cost of funds over variable interest rates.
  • Unable to benefit if variable rates remain low or fall as client is required to pay the higher Fixed Rate
  • Lack of repayment flexibility - total amount borrowed is set for the term of the loan. No unscheduled payments possible.
  • Significant termination cost may be incurred if the Fixed Rate solution is terminated early (prior to the maturity date).

Early Termination

  • If the Fixed Rate is terminated early (prior to the maturity date) an early termination amount will be calculated by the Bank with reference to the “mark to market” value of the Fixed Rate. The mark to market value is calculated as what a person would pay the Bank (or what the Bank would have to pay another person) to take over the Borrower’s rights and obligations under the Fixed Rate. This may result in a payment to be made to the Borrower, a payment by the Borrower to the Bank, that is, a termination cost or benefit. This cost/benefit is determined with reference to the notional amount, the differential between the fixed rate and the prevailing market rate for the remaining term, as well as the remaining duration of the Fixed Rate product. The larger these factors, the larger the potential magnitude of the termination cost/benefit, which can be significant.