It's All in the Timing
Loan: $150,000,000
Client: International office developer
Property: Office building
Location: Southwest
Project: Refinancing and Termination of Rate Protection
Benefit to Borrower: $1,200,000 Over 4 months
Borrower Situation
The developer wishes to refinance a floating rate loan protected by a LIBOR swap. As often happens, selecting a lender takes months, and preparing the documentation several more. Meantime, the LIBOR yield curve changes a little. The Treasury curve changes a lot.
CIRM Solution
Once the loan’s rate and spread are fixed, the borrower must close in three months. What to do with the old swap, and when? Unwind now? Wait till next month? Wait another month still? How do penalties, extension and breakage costs affect the choice?
CIRM’s advice: Wait. CIRM’s monitoring of the swap’s components indicates its value is increasing, even as its remaining life is shrinking.
Result
A month later, longer term interest rates go much higher, while short-term LIBOR stays unchanged. Delaying the unwinding gains the borrower an extra $1,000,000. Plus, the borrower saves $200,000 in interest, even with penalties, by taking a short-term loan and waiting another month to close.
Parenthetically, a side benefit emerges to involving CIRM in strategy and execution: When the swap vendor (and lender) attempts to “low ball” the unwind, CIRM calculates the true value of the product in real time, forcing the vendor to re-bid at market price.
