Interest Rate Swaps

All you have to do is specify the amount and currency involved, the starting date and period of the swap, whether you want to pay a fixed rate to us and receive a floating rate or vice-versa, and the method of calculating the interest rates to be paid or received under the swap. It’s that simple. HSBC will then advise you on the actual rate we are prepared to pay or receive under the swap.

Take for example:
Your company decides to borrow S$10,000,000 for five years at a margin of 3% over the three-month SOR. Every three months, the loan will need to be rolled over, and the risk to your company is that SOR will be at a higher rate than your budget rate, for part or all of the five-year loan period.

If you decide to fix the rate by using a swap, we can quote to you a swap rate of 7.50%, and agree to pay you 3m SOR. The swap covers only the SOR linked element of your borrowing costs. You do not need to borrow from HSBC to enter into a swap with us.

Irrespective of market interest rate movements over the specified period, once you have entered into this arrangement, you will continue to pay a fixed rate for your debt of, in our example, 10.50% (7.50% plus the 3% margin). Effectively, you are swapping a floating rate commitment for a fixed rate commitment.

Conversely, you can also swap to protect against a fall in interest income. For example, a company with a cash surplus, earning a floating rate yield, may be concerned that a fall in rates will have a significant impact on its P&L. It could lock into fixed rates by entering a swap.

One of the major differences between a swap and a fixed rate loan is the versatility offered by the swap. A swap can be tailored to your particular requirements and does not need to match the underlying transaction. Another difference is that swaps are easier to unwind than fixed rate loans. Fixed rates generally cost if you wish to unwind fixed rate borrowing and re-hedge at lower current rates.