With all of the discussion around the potential interest rate swap mis-selling by Banks, it is easy to lose sight of the fact that using derivatives to manage interest rate risk is an important activity.
Indeed, this is one of the key points we re-iterated to MPs & Lords when our MD, Abhishek Sachdev was asked to give Expert Evidence to the Parliamentary Banking Standards Commission (http://www.vedantahedging.com/hedging/commisson/)
With interest rate swap rates at some of the lowest levels seen in recent years, some firms are taking advantage and locking into some of these rates.
Diageo has increased its proportion of hedged debt from 57% to 99% over the last year.
Tesco increased its fixed rate proportion from 71% to 90% in the last financial year.
These FTSE companies are also of course facing costs of unwinding previous interest rate swaps. Vodafone for example reported a loss of £190m due to interest rate swaps in its last financial year.
Is the fact that some of the UK’s largest firms are taking a medium-term view of swap rates something that SMEs can take advantage of?
Unfortunately, the challenge for SMEs is that if they have hedged 100% of their debt already, they may not be able to hedge further amounts at these current low levels. In addition, even large credit-worthy firms are rarely being provided with committed facilities beyond 3 – 5 years in the current environment.
This is of course also interesting in the context of the Chancellor having just asked Andrew Tyrie’s Treasury Select Committee to review if SMEs should be allowed derivatives within a Retail ring-fence.
As ever, it is essential to obtain independent FSA Authorised advice regarding the hedging strategy that is appropriate for a business.