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Interest Rate Risk Management

Development, implementation and monitoring of appropriate strategies including currency and fixed/floating interest rate mix.

Interest rate risk is risk to the earnings or market value of a company due to uncertain future interest rates.

From a business perspective, movements in interest rates can have a significant impact on company performance. This is true whether the business is cash rich (i.e. a depositor) or relies on bank funding (i.e. a borrower). In both situations, finance managers can manage the interest rate risk to safeguard the company from an adverse move in rates.

For borrowers, management of an interest rate risk can:

  • Create certainty of debt repayments
  • Ensure accurate forecasting and budgeting
  • Safeguard profitability (or competitiveness)
  • Eliminate uncertainty from long term projects
  • Protect against rising interest rates.

At Treasury Solutions, we offer a comprehensive suite of interest rate risk services and professional guidance that helps companies improve their own risk management practices.

Other Support Services

  • Pre-hedging strategies for investment or acquisition projects
  • Development of hedging strategies as required under bank funding agreements for refinancing and/or acquisitions
  • Verification of the calculation of interest rate bills through our knowledge of market convention and access to data from Reuters
  • Expert witness in litigation cases re overcharging by banks.

Case Study

The Story

Company B, a private company was constructing a hotel in Ireland.  Treasury Solutions was retained to devise interest rate strategies on the associated bank debt.

Work Done

  • Review cashflow forecasts to analyse cashflow profile
  • Review bank facility structure and existing cash/debt position to understand initial funds flows
  • Understand minimum and maximum hedging requirements as established by funding banks and company treasury policy respectively
  • Assess treasury policy provisions in this area to confirm its appropriateness  or amend accordingly
  • Review past trends and current forecasts for short and medium term EUR and GBP interest rates and assess shape of current yield curves
  • Assess use of various derivatives as part of hedging strategy
  • Ensure that bank hedging lines are appropriate for potential hedging strategies
  • Ensure that other legal requirements and documentation capable of facilitating execution of proposed strategy
  • Liaise with accounting and tax advisors to ensure that accounting treatment is as expected and that deductibility of interest is ensured through the use of appropriate instruments in the correct legal entities
  • The above work was commenced 12 months before the finalization of the hotel construction as the company wanted to be alert to any bottoming out of interest rate trends that might have happened before the hotel was constructed in order to take advantage of such favorable interest rates.

Project Output

  • Full strategy document for approval by the Board
  • Synopsised strategy document for approval by the lending banks
  • Drafted ‘term sheets’ for circulation to banks in advance of deals and evaluated returned draft term sheets in order to achieve best pricing on the hedging
  • Documentation of contribution of resultant strategy to covenant compliance

Conclusion

Although a similar exercise in the past for the same client had resulted in hedging being put in place 9 months before the hotel opened, this time around interest rates moved downwards over the course of the 12 months and, in fact, continued to move after the opening of the hotel. Treasury Solutions negotiated with the bank to avoid the need to implement immediate hedging given the direction of interest rates. However, it had hedged a significant part of the exposure within 4 months of the opening of the hotel at rates which were significantly more favorable than those that existed, either when the monitoring had first commenced or on the date the hotel opened.

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