Interest Rate Hedges in Real Estate Finance: Placing Swaps, Caps, and Collars on Floating Rate Loans

Understanding Pricing and Trade Confirmations, the ISDA Master Agreement, Counterparties, Current Regulation of Derivatives

Recording of a 90-minute CLE webinar with Q&A


Conducted on Wednesday, February 22, 2017

Recorded event now available

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Program Materials

This CLE webinar will describe hedging transactions and ways to limit the parties' exposure to changes in rates. The panel will describe the role of the hedge counterparty and discuss key aspects of hedge documentation.

Description

Floating rate commercial mortgage loans present interest rate risk for borrowers and lenders. Real estate projects typically generate relatively steady cashflow, yet the parties to the loan must have confidence that the cashflow will be sufficient to pay debt service regardless of increases in interest rates.

Many market participants employ hedges to limit exposure to interest rate risk, with the most popular being rate caps, interest rate swaps, and collars. It is important for real estate counsel to understand how these hedge transactions work and what financial risks they entail.

Listen as our authoritative panel discusses each of these derivatives and how they are priced and memorialized. They will walk through each step of the hedging process and provide examples of the documentation, including the bid sheet, the trade ticket, the confirmation, and the ISDA master agreement and accompanying schedule. They will discuss the required debt ratings for the swap counterparties and cap providers, the issues which arise when an institution’s rating is downgraded, and the additional regulations imposed on derivatives under Dodd Frank. Finally, they will summarize the real estate attorney’s role in the hedge transaction.

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Outline

  1. Overview of interest rate hedges
    1. Purpose—protection against changes in floating rate during loan term
    2. Caps, swaps and collars
    3. Pricing and auctions
    4. Role of counterparty
    5. Need for collateral
  2. Interest rate hedge documentation
    1. Hedge term sheet/bid sheet
    2. Recorded phone call during which trade is executed
    3. Trade ticket
    4. Hedge confirmation
    5. ISDA Master Agreement
    6. Schedule to Master Agreement
  3. Impact of Dodd Frank regulations—eligible contract participant qualifications
  4. Role of borrower’s and lender’s counsel

Benefits

The panel will review these and other key issues:

  • What kind of interest hedge is appropriate for your transaction?
  • What are costs and risks associated with each type of hedge?
  • How are hedge transactions bid out, executed, and documented?
  • How are swap counterparties and cap providers currently regulated, and what are the qualification, clearing, and margin requirements for hedging transactions?
  • What is the role of real estate counsel in the hedge transaction?

Faculty

Koppele, Jeffrey
Jeffrey H. Koppele

Partner
Dentons US

Mr. Koppele provides advice on both tax and derivatives matters in a wide variety of financial...  |  Read More

Heimendinger, Mark
Mark Heimendinger

Of Counsel
Lowndes Drosdick Doster Kantor & Reed

Mr. Heimendinger has worked on a variety of financing structures and instruments, with a particular focus on real...  |  Read More

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