Government entities are increasing their use of interest rate swaps and incorporating swap products into overall debt and debt management strategies. Given the consistently low interest rate environment, interest rate swaps provide an alternative for government issuers to lower borrowing costs and decrease interest rate risk.
Interest rate swaps are primarily used as an internal cash management tool, and the issuer’s ability to manage the risks associated with the swap is critical to ensuring success of employing interest rate swaps in a debt management strategy. Some of the common aspects to consider when evaluating whether an interest rate swap makes sense are as follows:
• Size of the transaction
• The nature of the transaction
• Basis for calculating interest
• Size and sophistication level of the issuer
• Potential termination payments and materiality of potential loss on termination
• Credit quality of the counterparty
• Duration of the swap agreement
• Events of default or termination
• Collateral requirements
To learn more about evaluating an interest rate swap, contact Joseph Patrick, or any shareholder at Schneider Downs. We’d be happy to help.
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