September 21, 2022
Medical groups looking for a silver lining in a rising interest rate environment who have loans fixed with swaps may have just hit the jackpot.
The interest rate swaps that have been executed over the last few years have grown in value and now provide those borrowers with some significantly favorable economic options. That said, swap management is essentially a zero-sum game. The borrower will benefit from the outcomes shown below but the overall interest costs will remain the same.
Impact of Each Option
- Cashing In - Creates cash in hand for needs or reinvestment. Also reduces risk where there are no personal guarantees by removing exposed equity. Banks will often quote reduced values that can’t be seen by the borrower. A swap advisor will give you the true value.
- Blend and Extend - Borrower can improve cash flow and distributions by converting the value of the swap to reamortize or increase debt while keeping the same cash flow. Banks use the conversion as an opportunity to add additional unseen profit. A swap advisor will calculate accurate conversion values and eliminate duplicative swap spreads on existing debt.
- Paying Down Principal - For those interested in reducing debt, the value may be used to reduce the loan balance within the provisions of the loan agreement. Banks will often quote reduced values that can’t be seen by the borrower. A swap advisor will give you the true value.
How much are we talking about?
To give you an idea of the possible swap value you may have and how that value could be applied, let’s look at an actual example. In this case, a $20MM swap was executed on 5/1/20 for a 10-year term with a 25-year amortization. We will assume the bank added a 15 basis point swap spread to the actual swap cost as its profit.
From the graph, you will see that the swap had a negative value at inception because of the bank’s spread. Since that time, it has grown dramatically to a value of more than $3 MM that would be available to execute any of the options shown above. With that much at stake, it is easy to understand how an informed swap advisor should be an integral part of any swap transaction involving a termination or blend and extend.
For an estimate of your own swap value, fill out the request form above or contact Grant Blackhurst at email@example.com.