The debate is held over the swap. The answer is in the proportion of gross debt already fixed before anyone swapped anything, and in the cash on the other side.
The interest line has four numbers in it, and the smallest attracts more questions than
the other three together: swap carry of 360,000.00 on a total interest
charge of 26,547,500.00. It is paid because 180,000,000.00 of a floating term loan
was swapped to 3.20 per cent fixed while the base rate sits at 3.00 per cent. The right
question is not whether to pay it. It is what proportion of gross debt is fixed once the bonds
are counted — 78.1818 per cent — and what is left floating once the
group's own cash is netted against it, which is
-608,000.00.
Four instruments, two exposures
The accountant reads four instruments. The treasurer reads two exposures: what is fixed to
maturity, and what reprices when the base rate moves.
Line
Principal
Rate
Interest
Term loan, floating
300,000,000.00
4.75 per cent
14,250,000.00
Bonds, fixed
250,000,000.00
4.25 per cent
10,625,000.00
Revolver, undrawn
250,000,000.00
0.525 per cent
1,312,500.00
Swap carry
180,000,000.00
0.20 per cent
360,000.00
Total interest
26,547,500.00
The swap turns 180,000,000.00 of the loan into something that behaves like a bond: the swap rate plus the margin the swap does not touch.
What the carry buys, in one shock
Raise the base rate by 200 basis points and hold everything else still. Unswapped, the
whole term loan reprices; swapped, only the 120,000,000.00 that was left floating
does.
Unhedged
With the swap
Interest before the shock
26,187,500.00
26,547,500.00
Extra interest at +200 basis points
6,000,000.00
2,400,000.00
Interest after the shock
32,187,500.00
28,947,500.00
Interest cover after the shock
5.2194×
5.8036×
Against a covenant of 4.0000×. Cover before the shock is 6.3283×.
The shortcut in the middle row is wrong. Reading across
6,000,000.00 less 2,400,000.00 gives 3,600,000.00, and it measures
from two baselines 360,000.00 apart. The swap saves the difference between the two totals
after the shock: 32,187,500.00 less 28,947,500.00, which
is 3,240,000.00. Divide that by the carry and the trade has
a threshold: 9.0 years of carry buy one shock year,
so the swap pays if a rise of 200 basis points held for a year arrives at least once in
ten. How often it arrives is a view. It should be declared as one.
Where the covenant actually breaks
Cover reaches the covenant of 4.0000× when interest reaches
42,000,000.00. Unhedged, each 1 per cent on the base rate costs
3,000,000.00, and the covenant breaks at a base rate of
8.27 per cent. With the swap, each
1 per cent costs 1,200,000.00 and the covenant breaks at
15.88 per cent.
Both are far away, and that is the point: on this company leverage binds long before cover, so
the cover covenant is not the reason for the swap. The reason is cash. Without the revolver the
group clears its own minimum by 27,403,718.84, and unhedged the
6,000,000.00 of extra interest would take 21.8948 per cent of that
margin before anything else did. A rate shock and a revenue shock are not obliged to arrive on
separate days.
The proportion nobody chose
Debt
Amount
Fixed
Floating
Bonds
250,000,000.00
250,000,000.00
0.00
Term loan, swapped
180,000,000.00
180,000,000.00
0.00
Term loan, unswapped
120,000,000.00
0.00
120,000,000.00
Gross debt
550,000,000.00
430,000,000.00
120,000,000.00
Fixed share 78.1818 per cent, or 73.5043 per cent counting the overdrafts that cash nets.
Before the swap, the bonds alone made 45.4545 per cent of gross debt fixed. Swapping
60 per cent of the term loan sounds like a moderate hedge; the balance sheet it
produces is 78.1818 per cent fixed, which is a decidedly fixed balance sheet. The
first framing is the swap desk's and the second is the treasurer's. A policy written as
“hedge 60 per cent of floating debt” will produce a different balance sheet
every time the mix of bonds and loans changes, without anyone having decided that it should.
The cash on the other side
Cash earns floating too. Net floating exposure is the unswapped loan less the cash the
treasurer can actually place: 120,000,000.00 less 120,608,000.00, which is
-608,000.00. A negative figure means the group earns floating
on slightly more than it pays floating on. The proportion that looked moderate on the loan and
decidedly fixed on gross debt is, after cash, complete.
Three cautions belong on the same line as that figure. A deposit rate does not
move one for one with the base rate, and a bank can widen the deposit spread while the loan
margin is fixed by the facility. Cash is a balance on one morning; the loan is
300,000,000.00 every morning. And the cash is not all in the home currency: netting only
home-currency balances leaves an exposure of at most
64,392,000.00. Print both, with the date they were
computed on.
What to ask of the next rate proposal
It will arrive with a chart of forward rates and a figure for the carry, and neither is the
question. The question has three numbers in it. What proportion of gross debt is fixed, and what
the policy says it should be. What the net floating exposure is after cash, and on which
currencies. And what a 200 basis point rise costs in the year it arrives:
28,947,500.00 of interest as the balance sheet stands,
32,187,500.00 without the swap, 3,240,000.00 between them
for 360,000.00 a year.
The workbook behind this article
Every figure above is a live formula in the companion files for
Treasury Management — the five readings of cash, the liquidity
test, working capital and the discount, and the hedging book. Each file ends with a Checks
sheet setting the printed figure beside the computed one. They are free, and they need no
account and no email address.
At what wealth does a family office pay?A five-person office costs the same $2,442,000 at $100m as at $2bn. Against a tiered multi-family schedule the two curves cross exactly once.
Does an undrawn revolver count as liquidity?67.4567 per cent of the headroom, and it leaves at a fall in annual revenue of 8.4127 per cent — not the 13.3333 per cent the board deck implies.
Does supply chain finance count as debt?66,049,315 released, and leverage of 2.7622× or 3.1362× depending on which balance the test is asked of — the second is a breach at today's EBITDA.
Does the fulcrum move with enterprise value?A worked capital structure at three enterprise values. The break migrates from the first lien to the subordinated notes without a single document changing.
How many companies does a reserve pool defend?Holding pro rata to the Series D costs $14.76m per company. A $40m reserve defends 2.71 of forty — and 61 per cent of the cost is the last round.
How much room a 1.15x downside actually leaves79 basis points of margin. The leverage covenant fails first, five basis points before the coverage covenant the chapter reports on, and 4.6 per cent of EBITDA is the whole cushion.
How the GP catch-up is actually solvedMost write-ups state the catch-up formula then hardcode the answer. Set it as a solve and it moves on its own when the carry rate does.
How do you set a minimum cash balance?Three components, 124,596,281 in total — and the double count that turns a margin of 27,403,719 into an apparent shortfall of -3,988,281.
Is a 2/10 net 60 discount worth taking?An annualised 14.8980 per cent against a revolver at 4.50 per cent — worth 5,471,890 a year, and 0.3132 turns of reported leverage.
Should corporate debt be fixed or floating?78.1818 per cent of gross debt fixed, and a net floating exposure after cash of -608,000.00 — the proportion, not the instrument.
Six ways to state the same fund's return7.12 per cent, 18.04 per cent, or 1.323 times the public market — one fund, one set of flows. The eleven-point gap is the valuation, and it is not cash.
The IRR at which a closed-ended fund merely tiesA drawdown fund advertising 13.25 per cent ties an evergreen netting 8.64. On committed rather than called capital, 78.7 per cent of the edge vanishes.
The month a remediation trigger has to be armed byMonth 8, on a one-year window and a 14-week hiring lead time. The date is 12W − L/4.33 and holds for any portfolio size — the book only changes the euros.
Two routes to the same NAVFive findings in one quarter-end close, and not one of them was a modelling error. Every one was a control that did not exist.
What a CBAM certificate buffer costs to holdCarry and protection are both linear in the buffer, so the break-even probability is identical at 5 per cent and at 30 — and 2027 costs exactly twice 2026.
What a clawback actually collateralises24 million recovers 13.20 net of tax and 7.20 is escrowed. The rule is e ≥ 1 − t, and every euro won on the tax clause lands uncollateralised.
What a co-investment programme actually saves37 basis points, and a 22.8 per cent total-loss rate erases it. At the usual per-deal cap a single failure is 37 per cent of the annual cohort.
What a diligence exercise actually recoversEighteen basis points is only the part that reaches the yield. Three of the four instruments never do, and the exercise is worth thirty-one.
What a follow-on reserve is actually worth0.019 turns under plain dilution, 0.285 under pay-to-play. The optimum is a property of the shareholders’ agreement, not of the portfolio.
What a lease mark-to-market is actually worth5,788,000 becomes 807,365 once the over-market stream, the expiry dates and the cost of re-letting are priced — and nothing at all below a 43.7 per cent renewal rate.
What a minimum payment actually does£81.53 leaves the account and £20.46 reaches the debt. On minimums alone the set clears in 258 months and repays 1.78 times what was borrowed.
What a month of delay costs in an enforcement463,000 euros of present value a month. No single error about enforcement, and no pair of errors, moves the indifference point from 58.7 cents to the 72 on the table.
What a pro rata cheque actually costsDefending costs 1.25 times the initial cheque across two rounds, not more in each — and below a 521 exit the follow-on dollars come back worth less than they cost.
What a subscription line does to the IRR20 per cent becomes 38.41 on the same asset while the multiple falls. Two dollars of interest buys 18.4 points, and the longer the line runs the cheaper each point gets.
What one point of fees actually costsOne point on the annual charge turns 738,846 into 567,961 over forty years — 23 per cent of the pot, and 2.43 of wealth lost per 1 of fee.
When the promote stops clearingCarried interest is not proportional to performance near the hurdle. It is a step function, and $2m of headroom is what stands between a promote and none.
Why a secondaries bid-ask gap has no zoneThe seller’s floor and the buyer’s ceiling are one formula at two rates. At equal required returns the zone is exactly zero — here it is 11.02 points apart.
Why refining a due diligence rubric makes it weakerThree of twelve managers carry a terminal flaw and the average approves all three. Splitting eight domains into sixteen makes it easier to hide, not harder.