March 24, 2022
The current rising-rate environment is showing unexpected positive swap unwinds in favor of the borrower. If the borrower terminates a swap, the bank will pay the borrower.
Many of our clients who entered into interest rate swaps in the last two or three years are finding that these swaps now have a substantially positive value. There is an opportunity to take advantage of these values to positively affect the real estate entity or the practice.
Some uses of the positive swap unwind available for consideration include:
- Terminating the interest rate swap to provide cash out to the partners, which can be used in at least three ways:
- For further re-investment by the partners (a method of leveraging their equity)
- For asset protection (in those cases where there are no personal guarantees, this reduces the equity at risk).
- For reapplication in further real estate projects where there is needed equity
- To improve cash flow
- The positive value can be folded into a new swap and re-amortized. Oftentimes, this will result in a reduced cash flow, which advantages the senior doctors who may be retiring before the termination date of the loan.
- Lower the rate on new financing
- The positive value of the swap could be applied to the fixed rate of a new loan to lower the rate.
- Pay down principal
- The positive value of the swap could be applied against the loan balance and either float or replace the swap at current market rates. This reduces overall interest expense and can be very helpful if the borrower is looking to reduce its debt to get under a certain Loan-To-Value threshold.
It is important to remember that whatever you choose to do on a swap does not change the overall expense of the swap. It only changes the timing of that overall expense, which may be very advantageous.
Because these movements are dependent upon valuations that cannot be seen by the typical borrower, it is important to work with a swap advisor who can ensure that no added profits are taken by the bank during any of these transactions.
If you are unsure about the value of your swap unwind, CMAC will review your documents and advise your group on the next best steps. Email email@example.com or call 407-264-7255.