Originally published as part of The Outlook Newsletter
Vol. 1, Issue 1C
As the Federal Reserve has raised interest rates in its effort to lower inflation, interest expense to businesses with floating-rate lines of credit has increased rapidly and significantly. This expense is an input cost like any other commodity and has the same effect on cash flow and the bottom line. And with rates expected to remain more fluid in the short to medium term than they have been in the last 15 years, interest expense now poses similar risks to businesses as any other input or commodity with volatile prices.
Fortunately, interest rate expense can be hedged financially just like many other commodities with the use of swaps.
The basics of interest rate swaps
An interest rate swap is an agreement between two parties to exchange or 'swap' interest payments over a set period. A borrower will typically receive payments based on a floating rate (such as LIBOR or SOFR) in exchange for fixed-rate payments.
When combined with an equal floating-rate loan structured in the same manner, a borrower will receive the same amount of floating-rate interest from the swap that is paid on the loan - eliminating the uncertainty from the loan and creating a dependable fixed-interest expense.
The benefits of interest rate swaps
- Competitive Fixed Rate: A swap rate is a market-derived rate and is often the lowest fixed rate available.
- Customization: A borrower has discretion of the amount, dates, and structure to create a customized fixed-rate solution.
- Flexibility: A borrower can hedge a portion of floating rate exposure to preserve prepayment options.
- Market Value: A swap carries a market value (market-to-market) and allows a borrower to participate in a rising-interest-rate environment.
The benefits of working with StoneX
StoneX Markets LLC (SXM) is one of only a few non-bank CFTC-registered swap dealers in the United States. What makes SXM unique is that we offer interest rate swaps to a much broader market than our banking counterparts. By doing so, we can give smaller companies the same advantages as large institutions. We can also provide access to favorable rates by eliminating 'middlemen' from the swap process. By working with us, clients can:
Manage interest rate risk
Navigate volatile markets
Partner directly with a swap dealer
Drawing on decades of combined experience facilitating interest rate swaps, SXM professionals take a hands-on, listen-first approach to understanding our clients' needs and creating custom hedges to meet those needs. Businesses that are interested in minimizing their interest-rate risk and capital costs should contact Josh Cannington.