Swap rates over the past couple of years have been significantly elevated compared to today’s rates. If you have an existing swap, you can lower your rate today by extending and modifying your existing swap through what’s known as a “blend and extend”.
Rather than keeping your current swap rate in place through the swap’s maturity, then jumping down to a lower rate on a new swap, we can structure the swap to achieve a blended average rate for savings today in exchange for an above market rate in the future. An existing swap that’s nearing maturity would see a material improvement in the rate over the remaining term with minimal premium over the extended period.
A 3 year swap locked 2 years ago would have a rate around 4.26%. A swap to extend the current swap out another 2 years, meaning it starts in October 2025 and goes to October 2027, would have a rate around 3.04% today. Those rates could be blended to a 3.45% rate effective today through October 2027.
As with any swap, there’s potential for breakage but the incremental risk of breakage on the modified swap is limited to the savings over the remaining term on the current swap.
Below we’ve outlined a few potential scenarios to show how a blend and extend might be beneficial in today’s environment.
To explore the blend and extend strategy for your deal, reach out to us at pensfordteam@pensford.com or (704) 887-9880.
