Blend & Extend Transactions and Hedge Accounting
Welcome back to Hedging with Helen. Today, we’re going to be talking a little bit about interest rate cash flow hedging. I specifically want to talk about a blend and extend.
What Is a Blend and Extend?
So, what is a blend and extend? It suggests that you already have an interest rate swap, and it’s at an older, you know, presumably higher, less attractive rate. And you would like some immediate cash relief by getting a lower rate on that swap. So, the bank agrees to do that because, in the current rate environment, rates are much lower, and so they agree they’ll lower your fixed rate and extend the swap out, basically taking the negative position in the swap into account in setting kind of your new fixed rate for a longer period.
The good news on that is that these blend and extend transactions do qualify for cash flow hedging. It is a de-designation, re-designation event. It is a change in the instrument, and it does receive special hedge accounting. You don’t lose special hedge accounting because you have exited the old swap, so it will continue to account for gains and losses that were accumulated in that time.
I’m going to admit, the accounting is not as easy and straightforward as just entering into a brand-new swap, but you do get that cash relief in the short term. So the accounting is a little tricky but doable. And as usual, you know, like all things in derivatives, don’t let the accounting get in the way of doing what might be the right thing for your company.
It Makes Me Crazy…
Okay, what makes me crazy? When it comes to blend and extends, one of the things I think is super important is that you understand what the liability for your old swap is and what the market is for new swaps because you really need – I mean, yes, you know, the counterparty is offering you a new lower rate, but is it as low as it should be?
And you should be doing your homework. You should understand that, you know, the loss value in that old, your credit standing, and then what the new environment is for kind of that new swap. So you can have an idea of what you believe that new improved fixed rate should be.
So do your homework. Thanks.