Detroit TEI 2014

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2014 McDermott Will & Emery. The following legal entities are collectively referred to as McDermott Will & Emery! McDermott or the "irm# McDermott Will & Emery $$%! McDermott Will & Emery '%(!McDermott Will & Emery )elgi*m $$%! McDermott Will & Emery 'echtsanw+lte ,te*er-erater $$%! McDermott Will & Emery ,t*dio $egale ssociato and McDermott Will & Emery / $$%. These entities coordinate theiractivities thro*gh service agreements. This comm*nication may -e considered attorney advertising. %revio*s res*lts are not a g*arantee of f*t*re o*tcome.

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)oston )r*ssels hicago Dsseldorf "ranf*rt 3o*ston $ondon $os ngeles Miami Milan M*nich ew 5or 6range o*nty %aris 'ome ,eo*l ,ilicon 7alley Washington! D..

,trategic alliance with MWE hina $aw 6ffices 8,hanghai9

(nterest 'ate 3edging and 'elated (ss*esin a 'ising (nterest 'ate Environment

Detroit TEI December 9, 2014

William '. %omiersiw:omiersi;mwe.com

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genda

ommon (nterest 'ate 3edging Transactions . . . . . . . . . . . .

What are the TaB (ss*es . . . . . . . . . . . . . . . . . . . . . . . . . . . .

TaB 3edging onsiderations . . . . . . . . . . . . . . . . . . . . . . . . .

'edem:tion %remi*m 6::ort*nities. . . . . . . . . . . . . . . . . . . .

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ommon (nterest 'ate3edging Transactions

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Managing 'ising (nterest 'ates

(n a rising interest rate environment! a borrowermay consider the followinghedging 8or *nwind9 scenarios#

floating rate -orrower can synthetically convert the loan to a fiBed rate thro*gh a swa:agreement.

fiBed rate -orrower that :revio*sly converted the loan to a floating rate thro*gh a swa:may want to *nwind the hedge.

-orrower that eB:ects to iss*e fiBed rate de-t in the f*t*re can loc in a c*rrent ratethro*gh a forward starting swa: or similar rate loc transaction.

(n a rising interest rate environment! a lendermay consider the following hedging8or *nwind9 scenarios#

lender that holds fiBed rate de-t can synthetically convert the loan to a floating ratethro*gh a swa: agreement.

lender that :revio*sly converted a floating rate loan to a fiBed rate loan thro*gh aswa: may want to *nwind the hedge.

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8A?year term! ann*al :ayments9,W%

%ay floating?receive fiBed

'eceive "loating# $()6' B C100mm 8notional9

3ow Does an (nterest 'ate ,wa: Wor

,W% DE$E'

,W% DE$E'o*nter:arty

o*nter:arty

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,wa: commences immediately.

A

%ay "iBed# B C100mm 8notional9

%ay fiBed?receive floating

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ss*me that at the time of the first swa: :ayment! $()6' is .A#

"loating $eg 8swa: dealer9 C!A00!000

"iBed $eg 8co*nter:arty9 8C!000!0009

et %ayment 8swa: dealer9 CA00!000

F ote# the fiBed and floating swa: :ayments are generally netted! so that anet :ayment of CA00!000 wo*ld -e made -y the floating rate :arty.

"loating?for?"iBed (nterest 'ate ,wa:

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8A?year term! ann*al :ayments9,W%



(nterest on C100mm loan ; $()6'

3edging "loating 'ate De-t with a"loating?for?"iBed (nterest 'ate ,wa:

C100 Million $oan ; $()6'A?year term! ann*al interest

,W% DE$E',W% DE$E')6''6WE')6''6WE'

$EDE'8,9$EDE'8,9

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ss*me that at the time the first interest :aymentGswa: :ayment isd*e! $()6' is .A#

(nterest d*e to lender8s9 8C!A00!0009

,wa::ayment received C!A00!000 8floating leg9

:ayment made 8C!000!0009 8fiBed leg9

et %ayment 8C!000!0009

ote# the fiBed and floating swa: :ayments are generally netted! so that the-orrower wo*ld receivea net swa: :ayment of CA00!000.


>

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ss*me that at the time the first interest :aymentGswa: :ayment isd*e! $()6' is A#

(nterest d*e to lender8s9 8CA!000!0009

,wa::ayment received CA!000!000 8floating leg9

:ayment made 8C!000!0009 8fiBed leg9

et %ayment 8C!000!0009

ote# the fiBed and floating swa: :ayments are generally netted! so that the-orrower wo*ld makea net swa: :ayment of C1!000!000.


=

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810?year term! semi?ann*al :ayments9,W%

%ay "loating# $()6' B CA00mm 8notional9

'eceive "iBed# A B CA00mm 8notional9

(nterest on CA00mm loan ; A

3edging "iBed 'ate De-t with a"iBed?for?"loating (nterest 'ate ,wa:

CA00 Million $oan ; A o*:on10?year term! semi?ann*al interest

,W% DE$E',W% DE$E')6''6WE')6''6WE'

$EDE'8,9$EDE'8,9

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ss*me that at the time the first interest :aymentGswa: :ayment isd*e! $()6' is 4#

(nterest d*e to lender8s9 8C2A!000!0009

,wa::ayment received C2A!000!000 8fiBed leg9

:ayment made 8C20!000!0009 8floating leg9

et %ayment 8C20!000!0009

ote# the fiBed and floating swa: :ayments are generally netted! so that the-orrower wo*ld receivea net swa: :ayment of CA!000!000.


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8A?year term! semi?ann*al :ayments9,W%

,wa: commences one year from date forward contract is entered into.


3ow Does a "orward ,tarting (nterest 'ate,wa: Wor

,W% DE$E',W% DE$E')6''6WE')6''6WE'

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ss*me that immediately :rior to the swa: commencement date!$()6' is .A#

"loating $eg 8swa: dealer9 C!A00!000 B A

"iBed $eg 8co*nter:arty9 8C!000!0009 B Aet %ayment 8swa: dealer9 CA00!000 B A

F ote# the Hval*eI of the forward swa: immediately :rior to swa:commencement is the disco*nted :resent val*e of the net :ayments to -emade d*ring the term of the swa:.


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Detroit TEI 2014