Additionally, the product necessitates either using an incumbent bank counterparty or novating to a different bank, both of which can pose challenges if credit is limited or if pricing is less than transparent. Hedge accounting for such a transaction is more complex, requiring conversations with your hedge accounting advisor and auditors. While the upside of saving cash in this strategy is straightforward, the potential downsides are more nuanced.

Put differently, you are solving for a new swap rate that maintains the same liability value of the current swap but extends the maturity by several years.Ĭhallenges and considerations for using blend-and-extend swaps A new swap rate is solved for that, which will be higher than an at-market swap, but lower than the current swap rate.

Then, the current liability value of your existing trade is blended into this new swap such that the mark-to-market value of the new swap is the same as the old swap.

The current mid-market swap rate for a swap that is effective today and matures in 2024 is about 13 basis points*.

Your company chooses how far out you want to extend your hedge, suppose an extension to 2024 from an existing maturity date of 2022 (see example below).

The mechanics of an blend-and-extend work as follows: How does a blend-and-extend interest rate swap work? If your company wants to simultaneously reduce its swap rate to immediately lower cash interest expense and extend hedge coverage by multiple years, a blend-and-extend of your swaps presents an enticing strategy. Moreover, many companies face short-term cash needs as they cope with the shifting business environment of the pandemic. dollar (USD) interest rates during the onset of the COVID-19 pandemic in the United States, many of these swaps became significant liabilities, with pay-fixed rates often in the 2-3% range. Many corporate treasurers who hedged with interest rates swaps in the past few years now face a unique dilemma: following the precipitous drop in U.S.

What are the benefits of using blend-and-extend swaps?

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