Avoiding interest rate volatility
Swap getting popular in local financial market
Interest rate swap is gradually becoming popular in the country's financial market, as many firms are showing interest on such type of derivative to avoid interest rate volatility.
Swap is the exchange of one set of cash flows for another, floating to fixed rate or vice versa.
Usually taking place over the counter (OTC), the contracts are between two or more parties according to their desired specifications, and can be customised in many different ways.
For example, if a party borrows from overseas at a floating rate, swap will happen when the party wants to convert the loan into a fixed rate one, considering its long-term uncertainly.
There are three different types of interest rate swap: fixed-to-floating, floating-to-fixed, and float-to-float.
Bankers said in recent period, two big swap deals have been signed, one by the Eastern Bank Limited and other by the BRAC Bank Limited, amounting to US$ 140 million.
The Eastern Bank inked an interest rate swap deal with the Summit Group, the first-of-its-kind agreement for a local bank, in October 2018.
The deal struck up pertains to the interest payment on $ 71.25 million loans taken by the two Summit Group concerns-Summit Barisal Power Limited and Summit Narayanganj Power Unit II Limited-in December 2016.
On the other hand, the BRAC Bank signed a swap deal with the Ace Alliance Power Limited (AAPL) in March.
The BRAC Bank provided hedging for the AAPL's exposure to the London Inter-Bank Offered Rate (LIBOR) against its borrowing of $ 68.60 million for 10.3 years.
BRAC said its deal is the highest-tenor interest rate derivative for any private commercial bank in the country.
The AAPL, a 149-MW independent power project situated at Kodda in Gazipur, is jointly owned by the Summit Corporation Limited and the Summit Power Limited.
Md Shaheen Iqbal, head of treasury at the BRAC Bank, told the FE that the power company wanted to convert its loan into a fixed-rate one following global market volatility.
"We offered a fixed rate to the company for over 10 years."
With increased volatility in interest rates, such types of derivatives are becoming very popular nowadays, he also said.
In current volatile global market scenario, the AAPL found it imperative to hedge against the loss arising from floating rate loan.
"The BRAC Bank was able to provide the most effective derivative solution - interest rate swap - to convert the LIBOR-based loan into a fixed-rate one," he added.
Anis A Khan, CEO and Managing Director of the Mutual Trust Bank Limited, told the FE that product like swap is now surfacing here, as the country's financial market is becoming matured.
"We should encourage the situation, as it is too common a product, even in India," he opined.