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Interest Rate Risk Scenarios

Companies of all sizes have borrowed at floating rates and used interest rate hedging strategies — including interest rate swaps, caps, and collars — as alternatives to fixed-rate loans since the 1980s.
This strategy of borrowing on a floating-rate basis and using a separate transaction (such as a swap, cap, or collar) to hedge against interest rate increases can have advantages not found with typical fixed-rate loans.
Companies with excess fixed-rate debt may also want to use interest rate strategies and transactions to improve cash flow if fixed-rate debt is having a negative impact on profit margins.
Our interest rate specialists can help you manage interest rate risk in situations such as the following:

Existing floating rate debt

  • Your company has a five-year floating-rate loan priced at one-month LIBOR and is concerned that LIBOR will increase over the term of the loan.
  • Your company wants to obtain a fixed-rate hedge for a portion of its floating-rate loan, but is considering prepaying the loan 12 months early. In addition, you may want to acquire an option to terminate the fixed-rate hedge early without paying a lump-sum early termination fee, unlike a conventional fixed-rate hedge.

Plans for future borrowing

  • Your company is planning to increase its borrowings to finance a long-term asset in the next 24 months and is concerned about interest rates increasing before the new debt is issued.

Existing fixed-rate debt

  • Your company’s borrowings are heavily weighted toward fixed-rate debt and you want to achieve a better fixed- to floating-rate balance in your debt portfolio.
  • Your company wants to take advantage of lower floating rates and the potential benefits of lower debt service payments.

Tax-exempt and municipal borrowers

  • You have a future funding need and would like to protect against interest rate increases between now and the time your loan is issued.
  • You have the opportunity to issue floating-rate or fixed-rate municipal bonds and would like to explore your interest rate hedging alternatives.
Learn about what strategies we offer to tax-exempt and municipal customers.

Investment and liability management

  • Your company has investments mostly linked to the prime rate while your liabilities are linked to LIBOR. You are concerned about how these two indices could diverge and potentially have a negative impact on profitability.
Let our interest rate specialists work with you to meet your interest rate risk management and business needs. Contact Us
Hedging involves potential costs and risks, including opportunity costs and potential early termination fees. Nothing herein is a recommendation, solicitation, commitment, or offer for any swap, and Borrower acknowledges that Wells Fargo may be unable under CFTC regulations to recommend or offer Borrower a swap unless Wells Fargo determines the swap would be suitable. If Borrower would like information about swaps or hedging with Wells Fargo, we can refer you to our swap specialists.