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By Samuel Gruer
As a result of the economic slowdown caused by the COVID-19 pandemic, many budgets are strained and borrowers continue to look for ways to conserve cash as a way to increase their liquidity. Our clients and other issuers and borrowers have been refinancing and restructuring debt transactions to delay near-term debt obligations and create additional operational flexibility. Current market conditions may enable those with existing synthetic fixed rate transactions, as well as those who are about to enter into one, to apply this approach to their interest rate swaps for additional relief. This can be accomplished through the use of forward starting (or delayed) interest rate swaps.
The shape of the yield curve is currently fairly flat and rates are low as shown in the charts below. As a result, the cost differential, as measured in interest rate change, between a spot starting interest rate swap and a forward starting interest rate swap is fairly nominal. For borrowers who are about to embark upon a synthetic fixed rate transaction, delaying the start date of the swap is worth considering. A forward starting swap allows the borrower temporarily to enjoy the lower interest rates currently afforded with a variable interest rate financing as compared with the higher, synthetic fixed interest rate. While this exposes the borrower to interest rate risk in the short term, it is only for the period ending on the forward start date of the interest rate swap (e.g. one year), and can enable the borrower to reduce their interest rate cost and conserve cash in the near term.
Borrowers with an existing synthetic fixed rate financing can restructure the interest rate swap to delay the fixed rate payment period for a similarly lengthened period of time. For swaps that were originally executed in higher interest rate environments, a material amount of budgetary relief may be available. Thus, restructuring of an interest rate swap may be added as yet another tool in a liquidity preservation strategy.
If your organization has or is considering synthetic fixed rate transactions, we encourage you to reach out to your Blue Rose advisor to determine whether such a strategy might be an appropriate way to preserve liquidity in these uncertain times. Blue Rose can provide pricing specific to your situation and help you evaluate the associated risks.
About the Author:
Samuel Gruer, Managing Director Sam Gruer, a 30-year municipal market veteran, joined Blue Rose in June 2017 as a Managing Director and leader of the firm’s reinvestment business unit. During his career, Mr. Gruer has advised on and/or executed bond and derivative transactions totaling more than $30 billion. Serving in a fiduciary role, Mr. Gruer guides his clients through the debt/swap/reinvestment transaction process by making strategic recommendations based on sound, thoughtful and sophisticated analysis. He also offers expert advice on determining the optimal structure for reinvestment of bond proceeds by evaluating risk tolerance, identifying legal restrictions and estimating cash flow needs for his clients. Mr. Gruer can be reached at sgruer@blueroseadvisors.com.