Advance Restructuring For Your Institution

posted on Wednesday, December 13, 2017 in Advances

Blend & Extend

Suppose you have an existing advance with the Federal Home Loan Bank of Des Moines (FHLB Des Moines) and you already know that you plan to extend the advance upon maturity. Generally, the process would be to execute a new advance with the FHLB Des Moines upon maturity for the term desired. Simply put, take down a new advance once the current advance matures. However, did you know that it's possible to extend your liability prior to the maturity date?

You have the ability to do this through the FHLB Des Moines by restructuring advances, also known as Blend & Extend. The term Blend & Extend refers to the ability to prepay an existing advance, “blend” the prepayment fee into the rate of a new advance and extend the duration of the old advance. There is no need to wait until maturity to renew your funding needs.

There are several reasons it makes sense to Blend & Extend an advance for your institution. Perhaps you would like to lower the interest rate on your current advance, you can Blend & Extend an existing advance to make this happen. Suppose you would like to fill an existing funding gap, you can Blend & Extend to fill those gaps for any term between 2-years and 20-years. Lastly, if you know you will need to extend the funds and are worried that interest rates will rise before the maturity of the current advance, you can Blend & Extend the existing advance to get ahead of the rise in rates.

How it Works

The process to Blend & Extend an advance is not much different than prepaying an existing advance, except there will be no payment of the prepay fee once the transaction is complete. The prepay fee is still calculated as the present value of the remaining cash flows of the existing advance. There is no additional fee or premium included if you wish to Blend & Extend. It should be noted, however, that you will have to pay all outstanding interest due for the existing advance upon prepayment.

Whatever the reason, once you decide you would like to restructure one or more of your existing advances, you should contact your Relationship Manager or the Strategies team with the advance ID number(s).

Next, let's assume that we will be restructuring an advance with the characteristics in Table 1 below.

Table 1. Existing Bullet Advance

Member Institution
Member Name ABC Bank
Member Number 1111
Advance Currently Outstanding
Advance Number 123456A78900
Prepayment Fee Indication $150,000.00
Dollar Amount Remaining 1,000,000.00
Rate 6.20%
Maturity Date 6/15/2021

You will notice in Table 1 the prepay fee for the advance is $150,000, this fee will be incorporated into the rate of the new advance. The fee will be added to the posted rate of the term you choose for that date. The longer the term of the new advance, the lower the delta between the posted rate and the blended rate, which is the posted rate plus the additional spread to account for the prepay fee. This is due to the fact that the prepayment fee is being amortized over a longer period of time.

Table 2 demonstrates the additional spread over posted rates, by term, if you were to restructure the advance in Table 1.

Table 2. Restructured advance

(1)

Term

(Years)

(2)

Posted

Rate

(3)

Prepay

Fee Amortizing

(4)

Blended

Rate

(5)

Blended Rate

over (under) old adv rate

(6)

PV of New Advance

as of % of old

(7)

Term Extension

(months)

(8)

Maturity Date

of new Advance

4 2.31 3.93 6.24 0.04 100.14 5.0 11/16/2021
5 2.42 3.19 5.62 (0.58) 97.51 17.0 11/16/2022
6 2.55 2.70 5.25 (0.95) 95.25 29.0 11/16/2023
7 2.66 2.36 5.02 (1.18) 93.31 41.0 11/16/2024
8 2.79 2.10 4.89 (1.31) 91.75 53.0 11/16/2025
9 2.89 1.90 4.79 (1.41) 90.29 65.0 11/16/2026
10 2.96 1.74 4.70 (1.50) 88.84 77.0 11/16/2027
15 3.32 1.28 4.60 (1.60) 84.40 137.0 11/16/2032
20 2.52 1.05 4.57 (1.63) 81.34 197.0 11/16/2037

There is quite a bit to unpack in Table 2. The third column displays the amortized prepay fee over the life of the advance which is added to the posted rate for each term. As mentioned, you will notice the amortized prepay fee decreases as term increases. Column four states the rate of the restructured advance and column five compares the Blend & Extend rate to the rate of your existing advance. In this particular example, a term of four or five years will actually increase the term of your existing advance while decreasing the rate you are currently paying on it.

Looking further, column six indicates what the present value of the new advance would be in comparison to the existing advance. In order for the restructure to count as a debt modification, the present value must be within ten percent of the existing advance. You will see that the terms that do not qualify as debt modifications in this example are any Blend & Extends greater than 10 years. Any Blend & Extend greater than 10 years would be considered a debt extinguishment which requires the prepayment fee to be booked as a one time expense. It should be noted that the FHLB Des Moines does not provide accounting advice and the present value is provided as an indication only. The last two columns provide information on how long the existing advance will be extended and the maturity date of the new advance.

As you can see, there are a number of reasons to consider restructuring an existing advance. Whether you are interested in locking in a rate, lowering a rate, extending the term of your current advance or some combination of the three, advance restructuring can help you achieve your goal. If you are interested in potentially restructuring one of your advances, please contact your Relationship Manager or the Strategies team. Additionally, for more details about restructuring advances, please see the Advance Restructuring page on the FHLB Des Moines website.


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