Insights

“Springing” interest rate caps are a type of loan requirement that requires a borrower to purchase an interest rate cap post loan closing if (and only if) the floating reference rate (EURIBOR, SONIA) or a fixed reference rate (swap rate) crosses a certain threshold (often called the “trigger”)....

In our first and second note on liability management, we focused on borrowers who have issued bonds in the last two years and explored the advantages and disadvantages of buying back bond issues trading below par. Our third note of liability management will focus on derivatives. Against a...

The average rate tightening cycle has lasted 21 months with a total federal funds increase of 3.02%. Historically, long-term rates peak shortly before the Federal Reserve stops increasing short-term rates. Inflation may continue to climb well after the Fed curtails rate hikes.

An interest rate cap is an insurance policy on a floating-rate index like SOFR, LIBOR, SONIA, or EURIBOR. It pays out to the purchaser of the cap if the index rate increases above a pre-determined threshold (the “strike rate”). When this happens, the cap is considered “in-the-money.” Once a cap...

The upfront costs of interest rate caps have increased significantly in the past six months as short-term rates have risen and expected payouts on these caps have increased in probability and amount. This piece analyzes how cap pricing in the USD interest rate market factors-in expected future...

On 5 May, the Bank of England (BoE) voted six to three to raise the U.K. base rate by 0.25% to 1.0%. The last time the base rate was at this level was February 2009, when monetary policy was aggressively loosened to combat the effects of the Global Financial Crisis. The market reacted to the hike...

This piece is the first of a short series of thought pieces on how rising interest rates may impact housing associations' approach to managing treasury risk and funding. We look at the challenges and opportunities created for the debt portfolio, with a particular emphasis on organisations that...

With the Federal Reserve set to raise rates this week, and the market pricing in additional increases in June and throughout the remainder of this year, base rates like SOFR and LIBOR are likely to rise in lockstep. If these hikes occur as predicted, many interest rate caps will begin paying out...

There has been a recent divergence between the different variations of SOFR used in commercial real estate (CRE) loans, with Term SOFR increasing while daily simple SOFR and New York Fed 30-Day Average SOFR remaining relatively flat prior to the Federal Reserve meeting and the other starting to...

The Monetary Policy Committee met last week and voted eight to one on a bank rate increase by 25 bps. The messaging behind the statement however tempered the market’s expectations for the extent of future rate rises in the U.K. The European Central Bank also met the week before and their policy...

The Federal Open Market Committee (FOMC) raised rates 25 basis points in its first hike since 2018 as inflation reaches levels not seen since the early 1980s. The planned pace of rate hikes is aggressive with seven hikes in total slated for this year along with balance sheet reduction to begin in...

You may not have noticed, but your interest rate hedge may be worth quite a bit of money. As the Fed turns more hawkish in the face of inflation (which seems to be more than transitory), the forward curve for short-term rates has steepened significantly. The market is pricing in as many as seven...

2022 has started with a bang when it comes to movements in capital and money markets. The end of COVID-19, and associated policy responses, is giving rise to an economic environment which is causing central banks to rapidly reposition their stance on monetary policy. The Bank of England (BoE)...

An interest rate cap is essentially an insurance policy on a floating rate, most frequently SOFR. It has three primary economic terms: notional, term, and strike rate.

Movements in short-term rates like SOFR, used as indices for floating-rate financings, present a commonly understood source of interest rate risk for commercial real estate (CRE) borrowers. Movements in longer term interest rates can also create risk for borrowers. This guide examines the sources...

An interest rate swap is a financial contract in which two parties agree to exchange distinct cashflows for a given period of time. Commercial real estate (CRE) borrowers often encounter these swaps as a component of bank lenders’ fixed-rate financing offerings.

Understanding the tactical steps involved in executing on an interest rate cap can help CRE investors plan and use their time efficiently prior to closing on a loan. Request your interest rate cap execution checklist here.

The Federal Open Market Committee (FOMC) met this week and paved the way for further monetary policy tightening in the coming months. Their approach combines increases in the Federal Funds rate and balance sheet normalization, with quantitative easing (QE) ending in March and balance sheet runoff...

Several colleagues and I attended the 2022 NMHC (National Multifamily Housing Council) Annual Meeting in Orlando last week and, as always, it was a great conference. Attendance was strong and we were able to connect with many clients and other industry partners to get their read on the...

These frequently asked questions address some of the common issues that commercial real estate borrowers face when considering an interest rate swap. These include swap rates and mechanics, prepayment/breakage, and documentation.

Mergers and acquisitions involve a multitude of complexities and risks. Speed and accuracy at every stage of an acquisition is critical to not only winning the deal but also giving the transaction the best chance of financial and strategic success. Financial risk associated with the valuation of...

An interest rate forward curve for a market index (like SOFR) is, at a discrete moment in time, a graphical representation of the market clearing forward rates for that index.

Here are some key benefits of utilizing an advisor on a lender-required swap.

Interest rate swaps are one of the tools that commercial real estate (CRE) borrowers can use to manage the risk associated with floating-rate loans. Borrowers choose to purchase swaps with the rationale that they are “free”, especially when compared to an interest rate cap that typically requires...