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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 swap 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 based on 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 bonds are 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 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 risk management specialists work with you to meet your risk management and business needs.