Pros and Cons of ‘Blend & Extend’ for Interest Rate Swaps
In recent months, numerous clients have asked us to weigh in on the possibility of “blend and extend” (sometimes called “amend and extend”) for their interest rate swaps.
In such a scenario, a company extends an existing fixed rate swap over a longer period of time than originally proposed, at a lower interest rate. The overall liability grows, but it is now spread over a greater period of time.
Naturally, as with all approaches to hedging and swaps, there are pros and cons to blend and extend.
The positive side begins with the simplest benefit: Short-term cash outlay goes down. By spreading, for instance, a two-year liability over five years, less goes out the door each month, even if the total liability increases. Additionally, a longer term means the original purpose of the swap – hedging exposure – remains in place for longer.
There are, however, hedge accounting repercussions when such an action is taken. Chief among these are the fact that the swap must be dedesignated and redesignated, and the fact that the financing element introduced complicates the accounting down the line. Additionally, blend and extend can create ineffectiveness (which may or may not need to be booked), and can offer less visibility into pricing and costs than simply entering into a brand new instrument.
So, is blend and extend right for your interest rate swap? That’s a question only you can answer. By looking closely at your goals, your liabilities and your short- and long-term needs, you’ll be able to make the call that makes the most sense for your company.
Of course, if you’d like a hand, we’d be happy to help; contact us anytime, or call 408-350-8580 to speak with one of our interest rate hedging experts.