If your organization is borrowing on a term basis and you are concerned about the impact of interest rate volatility on financing costs, talk to your bank about the potential benefits of interest rate hedging.
Interest rate protection products – also known as interest rate derivatives – are hedging tools commonly used by borrowers to ensure that an increase in rates won’t inhibit their ability to service their debts. They may seem a little intimidating at first glance, but Hancock Whitney’s Capital Markets team can explain how they work and how they can be used to help your business.
By using interest rate derivatives, many organizations can lock in a borrowing rate lower than they could with traditional fixed-rate financing, and in some cases for a longer duration.
For financial managers and business owners, the uncertainty associated with volatile interest rate movements can be unsettling. That’s why many turn to interest rate hedging, which can minimize or eliminate rate volatility as an ongoing business concern.
A Flexible Set of Hedging Tools
The three main interest rate protection products Hancock Whitney offers are interest rate swaps, caps and collars. While each product seeks to accomplish a different goal and is attractive to different borrowers for different reasons, they all allow a borrower to manage the interest rate fluctuations associated with their floating-rate loans.
An interest rate swap will lock you into a synthetic fixed-rate loan by “swapping” the floating interest payments each month for a fixed interest rate that is locked in at inception. An interest rate cap will cap your interest expense at a certain rate while allowing you to enjoy the benefits of lower interest rates if they float beneath that rate. And an interest rate collar allows you to enjoy most of the benefits of an interest rate cap at a reduced or no cost to you.
Valuable in Any Rate Environment
These tools are best known for their ability to protect borrowers against rising rates but they can be utilized to take advantage of falling rates.
For example, if interest rates are anticipated to fall in the near future, you could lock in a “forward starting swap” that takes effect months or even years in the future when rates are expected to be lower. We can also modify a swap during periods of low interest rates to allow you to enjoy the lower rates.
Flexibility and Creative Solutions
Since interest rate derivatives are highly flexible, we can creatively customize the structure to meet unique needs and situations. For instance, we have a client, a large church, that had a 10-year loan with a 20-year amortization. The church leaders were concerned that at the end of 10 years their loan balance would still be substantial. If interest rates at the time their fixed rate expired were very high, they would not be able to continue to service the loan. To address their concerns, we structured an interest rate swap that effectively locked them into a desirable fixed rate for the full 20 years.
Portable and Transferable
An often-underappreciated feature of interest rate protection products is that they are portable and transferable. The derivative is a separate product from the underlying floating-rate loan, so you can move it between loans or even between entire companies. Should you lock in a swap with an attractive low rate and later decide to pay off the underlying debt, you can “link” that swap with a different loan and maintain that low swap rate.
Customizable to Meet Your Needs
As discussed above derivatives can be molded to suit an incredible variety of business needs, strategic timelines and loan terms.
Our goal in Hancock Whitney Capital Markets is to free our clients from the burden of being constantly consumed with the direction of interest rate movements. We want to allow you to focus on running your core business and operating with financial stability. If you have questions about limiting interest rate risk or how derivatives can help your business, reach out to your relationship manager to set up a meeting with a Capital Markets representative.
This information is general in nature and is not intended to be legal, tax, or financial advice. Although Hancock Whitney believes this information to be accurate, it cannot ensure that it will remain up to date. Consult an appropriate professional concerning your specific situation and irs.gov for current tax rules.
This communication is provided for educational and general marketing purposes only and should not be construed as a recommendation or suggestion as to the advisability of entering into any particular type of derivative transaction or taking a particular course of action for any specific client. In providing this communication, Hancock Whitney not undertaking to provide specific financial advice or to give advice in a fiduciary capacity.
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