A Swap Provides Sizable Savings

Background

A client was refinancing an $8 million bank loan on a commercial property.  He had a new LIBOR-based loan proposal from his current bank, and he was also considering a fixed-rate loan through a CMBS program (commercial mortgage-backed security).  The new loan proposal also offered him a fixed rate through an interest rate swap.  Our client was unfamiliar with swaps, having never entered into one before.

Consultation

DerivGroup reviewed the loan proposal from the bank and advised the client on negotiating the variable rate of the loan and the swap language it contained.  DerivGroup also compared the fixed rate the client could obtain on the loan through a swap with the fixed rate of the CMBS alternative.

DerivGroup analyzed various hedge structures as alternatives to a simple straight swap of the loan for its full maturity.  DerivGroup calculated the present value of these different hedges under various future LIBOR rate scenarios, comparing them to the swap.

Resulting Savings

The client ultimately decided on a partial interest rate cap/swap hedge structure for the new bank loan.  This choice carried a lower cost that the plain fixed rate swap and gave the client much more future prepayment flexibility than the CMBS borrowing.

DerivGroup was able to source through its network of dealers the interest rate cap portion of the hedge for a lower cost than the client’s bank would sell it.  DerivGroup was also successful in negotiating a lower rate on the swap portion of the hedge.