Stop. Check your calendar. If you haven’t yet secured a token of your affection for your dearly beloved, it’s not too late to make a few mouse clicks and place an order for same-day delivery. Go ahead, I’ll wait.
I’m not kidding. You’ll thank me later.
With Valentine’s season upon us, the snow’s thawing and we can all start dreaming of the emergence of spring. Much like our winter wonderland, the debt markets seem to be thawing a bit as well, with a resulting re-emergence of forward hedging. As companies are starting to see a bit of certainty around future debt issuances, forward hedging discussions have returned. We’ve seen a growing number of companies getting ISDAs and credit capacity in place with banks, monitoring rates, and waiting for a level of certainty around their financing plans to move forward with hedging future interest rate exposure.
For those of you already in a committed relationship with a lender, you may be considering a lender rate lock to remove interest rate risk from the equation while you finalize the loan closing process. You’ve done your courting and you’re ready to buy the ring and seal the deal. Now, today of all days, I probably don’t need to tell you that all diamonds are not, in fact, created equal — and that a little research can go a long way. The same advice holds true for your rate locks. A quick primer on the 5 C’s:
Clarity. While the concept of a rate lock is fairly straightforward, the intricacies of the language and the calculations can often be far less intuitive and can vary significantly from bank to bank. Do you have a clear understanding of your upfront costs, the extent to which you bear associated hedging costs for the bank, and any potential liability going forward?
Color. Are your rate lock terms standard in the market? Is the forward carry charge reasonable? Have your peers been using different products or structures to lock in forward rates? Just as a high quality diamond will ironically exhibit a lack of color, we value our ability to provide this same transparency in your rate lock agreements.
Cut. What happens if you cut the deal? If your loan fails to close, what are the exact breakage mechanics to settle your rate lock? Under what conditions are you responsible for the lender’s hedging costs? Which fees are non-refundable? As the recent market meltdown illustrated, paying attention to these details is not just legalese, it can make a huge economic impact.
Carat. A diamond’s weight is perhaps one of the simplest characteristics to measure, but carat alone will not accurately reflect a diamond’s size or quality. When weighing your rate lock options, you’ll want to consider how the combination of terms will come into play for a given transaction, depending on your certainty around the closing, your ability to post cash collateral, the ability to extend if needed, and any other factors affecting the specific transaction.
Certification. Beware of certifications from those who sell the diamonds (or rate locks)! It’s important to know whether you’ll be receiving the bid-side or mid-market rate, whether the swap spread and treasury will be quoted separately, and if the rate you’re locking is current and accurate based on the specified source. Depending on the size of your loan, fractions of a basis point could have a notable economic impact.