Cardea Partners saved a borrower more than $325,000 in derivative expense on a $100 million syndicated bank facility with targeted negotiation. In this case, the lenders required the borrower to hedge 50% of the outstanding debt for the term of the facility. With 3-Month LIBOR at a miniscule 0.27% and the pay-fixed swap rate at 2.27%, the initial premium to fix had significant cash flow implications. Fixing immediately would have meant the borrower would be paying $80,000 more in interest costs per month on the $50 million portion of the debt.
Our market view was that the Federal Reserve would keep short term rates at historically low levels, a stance that generally keeps LIBOR low as well. We recommended and negotiated with the banks that the hedge start 18 months in the future. This had two effects; first, it allowed the borrower to float at LIBOR levels well below the swap fixed rate and thus reduce early term cash flow expense and second, it eliminated 18 months worth of swap transaction fees.
We also negotiated the final swap fee for the forward starting structure and were able to capture a 60% reduction for our client. Our approach to fee negotiation is to use mathematical models based on credit quality and tenor to support market-appropriate credit charges that yield a fair return for both borrower and swap provider. Cardea Partners can leverage our experience in this vital process to save money for your firm.