Financial Institutions Case Study: Asset Liability Management Our Client: A regional bank with a newly issued brokered CD portfolio. Situation: Our client was asset-sensitive and had just issued 5yr brokered CDs that paid a fixed rate of interest. The client lends to borrowers at a floating rate of interest plus a credit spread, with a nominal floor. The net interest margin (NIM) would benefit from rising rates in the future, but in the short-term NIM was compressed by the long-term funding rate relative to the floored variable rate loan portfolio. Summary: Chatham Financial assisted the client with alternative hedging scenarios to reduce the impact of its relatively high, fixed-rate long-term funding. The client was considering a receive-fixed swap vs. a floating rate with sold floor based on the Prime rate, with the intention to designate the combined swap/floor against its…

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Real Estate Case Study: Debt Ratio Our Client: A public real estate company specializing in asset management in the hospitality sector. Situation: Our client had paid down a significant portion of their floating rate line of credit, leaving them with a fixed/floating rate debt ratio higher than they desired. With hotel assets essentially re-pricing daily, the client wanted to increase their floating rate exposure on the liabilities side to better match the characteristics of their assets. Summary: We discussed entering into a receive-fixed swap to rebalance their fixed-floating mix. A secondary benefit of this strategy was that it allowed them to reduce their current interest expense due to the steepness of the yield curve; the receive fixed swap synthetically transformed a higher fixed rate obligation into a lower floating rate obligation, based on an historically low current LIBOR setting. Because…

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Real Estate Case Study: Mezzanine Debt Our Client: A nationwide owner of hotels. Situation: Our client’s hotel portfolio was leveraged with a number of long-term low fixed interest rate loans. Since the origination of the original first mortgage debt, increases in operational efficiency for the portfolio resulted in improved portfolio cash flow. Our client’s desire was to use the increased cash flow as a borrowing base to create additional liquidity for new capital investments in the portfolio. The prepayment penalties associated with refinancing the first mortgages along with the faltering CMBS market made a conventional refinancing cost prohibitive, and market turmoil made traditional, low-leverage, mezzanine debt unavailable. The client engaged Chatham to find a capital partner. Summary: As is typical with our engagements, Chatham’s role started with the strategic planning of the transaction and continued until the deal closed. We…

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Interest Rate Risk Management As a company issues debt, whether to support the acquisition or divestment of an asset, or as part of its M&A activity, it must decide how to manage the financial risk associated with interest rate movement. Regardless of whether they secure fixed or floating rate financing there are associated risks. With floating rate debt, there are risks associated with rate movement. Similarly, fixed rate financing has rate implications at the time the rate is locked in and if and when the loan is refinanced later on. There are risks associated with both approaches. Interest rate movement can have significant effects on investment and operating cash flows and returns. Even if rates are stable, rates can change quickly and such factors as government intervention and economic policy can drive rate changes in unpredictable ways. Managing interest rate…

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Solutions to mitigate interest rate volatility Whether it’s a real estate project or a portfolio of properties, there are inevitable questions about how to protect against changes in interest rates. What should be your fixed vs. floating debt ratio? Is there a lender-required cap or swap? What is your refinance risk? What about fair ISDA terms and derivatives regulation like Dodd-Frank? Chatham Financial has the right answers for real estate investors. We are an independent firm specializing in capital markets and trading expertise. Our services are designed to reduce burdens on resources, save time, and bring transparency to complex transactions. How Chatham helps reduce interest rate risk Tailored risk assessment and analysis: Chatham Financial has helped manage interest rate risk for real estate investors for over 20 years. Each solution involves analyzing the underlying exposure and evaluating hedging alternatives. Whether…

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