Hedging with Helen: Future Issuance of Fixed-Rate Debt

Today, we’re going to be talking about the future issuance of fixed rate debt.

So, those of you who are going to be issuing fixed rate debt in the future – and that could be in six months, it can be in a year, it could actually be in two years – you want to lock in the rate environment where we are today for that future issuance.

That is available. There are instruments, and there’s special hedge accounting that help you get there.

So, if you want to issue that debt, what we can do is use a T-Lock or a forward starting swap. What we would then do is apply special hedge accounting. We would apply cash flow hedge accounting.

We would need to perform an effectiveness test because again, you never know exactly the date that you’re going to be issuing that debt, so the effectiveness test would basically give you that window of time – maybe a quarter or maybe up to six months of leeway that you would be able to issue that debt.

We would make sure that the rest of the documentation was in place, the hedge relationship, etcetera.

What happens then with the hedge accounting?

We basically are going to have a cash gain or loss at the point that we issue the debt and close out the T-Lock or the forward starting swap.

However, that cash gain or loss goes up into OCI and then gets amortized over the life of the fixed rate debt. In essence, that’s going to bring you your future issued fixed rate debt – at least the benchmark component of that debt will be at this rate that you have locked in. And that’s what the special hedge accounting delivers for you.

And if we can help you with that, let us know.