Call us on 020 7183 2277
Download LATEST Market Rates >
Traditionally, there is no upfront ‘cash’ cost of entering into an interest rate swap. The swap ‘fee’ is basically taken by the selling bank as a ‘spread’ built into the rate. (There is also some ‘capital’ or ‘credit’ used such as property security to protect against break costs, but this is not relevant for this discussion).
However, we are increasingly seeing a large number of clients entering into ‘in-the money’ swaps with their lenders in order to avoid breaching any ICR covenants. ‘In-the-money’ swaps are swaps which you are entering into at below market rate; this will involve an up-front cash payment. For example, if the current five year swap rate is 4.57%, you may pay £X up-front to bring the rate down to 3.75%. You will then have a swap with a fixed rate of 3.75%.
In general terms, even attractive leases (such as RPI-linked rent reviews) have not allowed rents to rise as fast as interest rates and as a result, breaches of Interest Coverage Ratios (or ICRs) covenants are much more likely. It is important to be proactive as negotiating with the bank will undoubtedly be easier and more favourable to the client when there are options and aren’t forced into anything.
It is an interesting analytical exercise to review buying a swap vs buying a cap.
There are multiple factors to consider before entering into a product and we can assist with all aspects including looking at cash flow forecasts across the full loan term to implement a strategy that will satisfy the covenant(s) and importantly at an up-front cost that is viable. In a few recent projects, we have looked at a ‘staggered’ set of rates within the same swap (i.e first two years will have a fixed rate of 3.75% which then steps up to 4.25% for the remaining three years). Since these discussions are inextricably linked with the Relationship / Credit teams, we also assist in negotiations with them, which can often help since we can understand the bank’s concerns, and address them in a variety of ways.
If you think the above is applicable to you, please feel free to get in touch with us. We would be happy to provide indicative up-front payment figures and start discussions with your lender.
We work with a panel of independent cap providers who are able to offer both Base Rate and SONIA caps. Please click here to view our article on independent interest rate caps. We are also able to source independent interest rate swaps and more information can be found on this by clicking here.
You can reach us on 0207 183 2277 or at info@vedantahedging.com.
