Interest Rate Hedging, Hedge Extension, US

Client Brief

A client had obtained medium-term, floating rate financing for an acquisition and, because the company believed that the life of investment would extend beyond the term of the financing (which it was confident could be refinanced or extended in due course), it wished to lock-in low interest rates to maximize returns.

PMC Solution
  • Negotiate with the existing lenders to implement a conventional floating to fixed interest rate swap for the life of the financing; and
  • Structure an additional floating to fixed rate swap for a period beyond the life of the loan with a cash settled termination provision such that the investor was hedged for the life of the intended investment (rather than just the financing) but so that the lender swap counterparties had no credit exposure beyond the life of their existing loan.
Results & Recommendations

We enabled the client to effectively implement a hedge that enabled it to secure an interest rate that was historically low for the entire life of its investment rather than just for the period of the financing.