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.
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.
- 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.
- 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
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.
Contact us if you require more information on this topic
What Our Clients Say
We are a large company with a turnover of c.€250m. Initially we used Treasury Solutions to review our treasury policy and procedures to ensure that they were appropriate to an organisation of our size and complexity. Since then the group refunded its entire debt as part of a major acquisition and the advice we received in relation to strategy, bank covenants and facility letters was invaluable. TS have continued to support us through the current financial crisis with pragmatic and independent advice.
CFO,, Large Company
I have used Treasury Solutions since 2005 for a variety of roles - from the creation of a top class Treasury Policy that is tangible and meaningful, to a review of our treasury function from an Audit and Best Practice viewpoint, to adhoc day-to-day advice and views (on) what is happening in the re-financing market….reliable, consistent and customer-focused; they are very much a part of my decision making process.
CFO,, Large PLC and Private Company
Since the downturn, I have used Treasury Solutions as a sounding board and to watch my back in terms of banking covenants and funding strategies. At all times, I have found them to be approachable, plain speakers and experts in their area. I think … their fees could have been the best spent money that our company has spent in the last few years.
CFO,, Major Private Company
We used Treasury Solutions to assist us with the development of a foreign exchange policy. Their suggestions were practical and well communicated. They understood the subject thoroughly and we will use them again in the future should the need arise.
FC, , Private Irish Company with turnover of €160m
We are an Irish owned multinational company with a turnover in the region of €350m and 2,000 staff. Our treasury function is very complex with a large number of FX exposures and funding arrangements…Treasury Solutions has given invaluable support on a wide range of matters from strategic policy to day-to-day advice….independent, professional and thoroughly competent.
Group Finance Director,, Large Private Company
John Finn of Treasury Solutions continues to be an invaluable help to us as a small business in our long-term financial planning and in our dealings with financial institutions. In most recent times, his experience and up-to-date knowledge of the financial scene allowed us to be confident of our case in prolonged and difficult negotiations with our main banking partner. Encouraged by John’s tenacity and advice we achieved a favourable long-term result, which will allow us to get back to focusing fully on the running and developing of our business.
Ruairí & Marie-Thérèse de Blacam,, Inis Meáin Rest. & Suites