PNC gets it. Here is the link to a valuable video by PNC about tools to evaluate your risk of a rise in interest rates.
The presenter is knowledgable but my key takeaway is that it’s better to talk with a specialist to address what’s right in your own situation.
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Text of Video:
With interest rates at all-time lows, some companies may have been lulled into a false sense of security about interest rate risk. Don’t let today’s volatile markets take you by surprise.
I’m Hans-Michael Hurdle, senior vice president and managing director of PNC Bank, National Association.
In the face of growing optimism about the domestic economy and an improving prognosis for Europe, the intermediate and long end of the yield curve has been trending up dramatically and unpredictably.
Given where we are in the interest rate cycle, companies are now prudently considering hedging a portion of their projected debt portfolio for longer durations, such as 5 to 10 years. Current 5-year rates are trading at 1.26% and ten year rates are trading at 2.26% or 26 basis points off historic lows of 2.00.
Given the likely prospect of increases in 30 day LI BOR over the next 3 to 10 years, borrowers can use cash flow–at-risk, or CFaR, models to project their own sensitivity to rising short term rates. This type of model can measure the probability of your interest expense exceeding a certain dollar amount within a specific timeframe. It helps answer the question: How much of a deviation can I expect between my planned and actual cash flow?
As you can see, in this interest rate risk sensitivity analysis, based on historic movements, ABC Company is taking $41 million of cash flow at risk associated with floating rate risk over the next 10 years based on their current and projected debt.
Ascertaining the cash flow at risk is the first step in determining a borrower’s interest rate risk management strategy. To the extent a floating rate borrower is looking to de-leverage completely, the forward 30-day curve would suggest that a company with a 2-3 year repayment window has significantly less cash flow at risk than one with a 5 to 10 year horizon.
Given the likely increase in short term rates, borrowers should strongly consider implementing the cash flow at risk modeling process for floating rates in order to ascertain interest rate risk and develop the appropriate risk mitigation strategy.
If you are interested in learning more about evaluating risk and developing risk mitigation strategies to address today’s highly volatile market, please contact me using the information on the next screen. Thank you for your time and attention.