After a period of negative investment rates, custody fees on funds held with banks and almost cost-free financing, the financial markets are returning to normal, and the management of interest rate risks is once again gaining importance. The higher a company’s proportion of debt financing, the more important it becomes to analyse variable-rate loans in particular when interest rates are rising.
Active interest rate management tends to play a relatively minor role for most corporates. Particularly among medium-sized companies, this may be due to high equity ratios or a lack of choice when arranging financing. There is often a mix of fixed-rate and variable-rate financing in which the interest rate risk appears too low for treasury to manage it actively.
However, as financing volumes increase, often in connection with a company’s international expansion, it can be worthwhile to determine the potential additional costs resulting from a lack of interest rate hedging and to consider suitable risk mitigation instruments. Instead of agreeing to an often very high fixed interest rate for a long term, a company may, for example, arrange variable-rate financing and exchange variable interest payment flows for fixed payments over a defined period, with the option of adjusting the arrangement again at a later date.
Forward Rate Agreements, under which an interest rate is fixed before the underlying loan actually begins, are among the available interest rate hedging instruments. Options can also be used to limit the impact of interest rate changes through compensation payments by the counterparty once certain conditions are met. One well-known example is an interest rate cap, which sets a maximum rate if the underlying variable interest rate reaches a defined level during the agreed term.
Trinity TMS helps assess interest rate risks and identify suitable hedging instruments. The instruments are recorded, valued and monitored in the system, and their effectiveness is analysed. This can be performed centrally for all entities within the corporate group and gradually transitioned into a centralised financing structure in which intercompany loans are provided to the individual entities. Trinity TMS generates interest and repayment schedules for all credit facilities and loans, which can be compared with the payment schedules of the hedging derivatives. Variable-rate loans are valued on the basis of automatically imported interest rates and yield curves, enabling the effectiveness of the interest rate hedging strategy to be monitored continuously.
All cash flows arising from interest rate hedging transactions are immediately reflected in liquidity planning and cash management without the need for duplicate data entry. Both cash flows and valuations can be transferred to financial accounting for automatic posting via the account assignment module.
