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Hedges serve as insurance policies on new or existing loans
Managing risk is one key to corporate success. First American Bank offers companies several strategies and products that allow them to limit interest rate exposure and reduce uncertainty. We provide the following types of Interest Rate Hedging:
- Interest Rate Swap: A separate contract allows a customer to effectively convert a floating rate loan to a fixed-rate for a period of time. There is no upfront cost; the cost is built into the rate.
- Interest Rate Cap: A separate contract puts an upper limit on the interest rate of a customer's floating rate loan. Caps provide protection from rising rates, while still permitting a customer to benefit from falling rates. Customers pay an upfront fee for this protection.
- Interest Rate Floor: A separate contract puts a lower limit on the interest rate of a customer's floating rate loan. Customers receive an upfront fee for giving up the benefit of falling rates.
- Interest Rate Collar: A combination of a Cap and a Floor puts both an upper and lower limit on the interest rate of a customer's floating rate loan. Collars are often structured as "Costless," so that the fee paid for the Cap is equal to the fee received for the Floor.
- Forward: A hedge executed today with an effective starting date in the future. For example, a customer with a balloon payment on a loan due in six months could use a Forward Swap to lock in an interest rate for the loan's renewal, eliminating the risk of rates rising in the interim period.
- Simplicity: Hedges require no modifications to an existing loan. They can be also used for non- bank debt such as public bonds, subordinated debt and seller notes.
- Flexibility: Because hedges are separate contracts, they allow you to manage rate risk independent of financing decisions. They can be structured to accommodate amortizing or accreting loans, or for a portion of a line of credit. The contract term can be shorter or longer than the underlying loan.
- Speed: Once the documents are in place, hedges can be executed in minutes via a phone call.
- Termination: Unlike loan prepayment fees, the cost of terminating a hedge is based on current market conditions. As interest rates drop, the cost will tend to increase. However, as rates rise, the cost decreases. Customers could receive a fee upon termination in a rising rate environment.
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