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Interest Rate Risk Management

Beyond 2009 - 2017

May 2, 2017

CONFIDENTIAL | 2

Swap transactions may not be suitable for all entities or persons, involve the risk of loss, and should only be undertaken by those who are

Eligible Contract Participants as defined in Section 1(a)18 of the Commodity Exchange Act. There is no assurance that any transaction will

achieve its anticipated objective. Past performance is not indicative of future results. Any pricing herein represents an indicative quote only

and is subject to change.

Darren Kirby

Managing Director

Interest Rate Management

Tel. 312.704.6941 222 S. Riverside Plaza

Cell 312.798.9844 30th Floor GRVR0C

[email protected] Chicago, IL 60606

Darren Kirby joined Fifth Third Bank’s Interest Rate Management

group in 2006, and in recent years has helped to develop Fifth

Third’s corporate interest rate hedging business. Darren has

worked in interest rate derivative sales, providing hedging

strategies for clients, for the last 17 years. Prior to specializing in

interest rate hedging solutions, Darren held various roles in

capital markets and risk management, including work with the

consulting arm of a Big Four firm in New York, focusing on risk

management for international financial institutions.

Darren holds an MBA from the Stern School of Business at New

York University and a Bachelor of Science in Economics from the

Wharton School of Business at the University of Pennsylvania.

Introduction

mailto:[email protected]

CONFIDENTIAL | 3





Interest Rate Market Overview

Fifth Third Bank is pleased to have the opportunity to provide a review of the current interest rate market and simple

hedging strategies to deal with rising interest rates.

Most borrowers have enjoyed a protracted period of low interest rates engineered by the Federal Reserve to help

accelerate growth, inflation and employment in the United States.

After 8+ years of multiple rounds of quantitative easing (QE) and an aggressive zero interest policy (ZIRP), the Fed has

“tapered” its bond purchasing activity, raised its Fed Funds target rate three times (Dec 2015, Dec 2016, Mar 2017), and is

openly discussing the timing for reducing the size of its balance sheet, suggesting 2017 will be the year.

Continued economic growth, further improvements in employment, or acceleration in inflation expectations, among other

factors, could trigger hastening of Fed rate hikes.

For borrowers with significant variable rate debt and therefore exposure to changes in short term index rates, rising interest

rates (both short term and long term) could have significant implications on cash flows, debt service, covenant compliance,

etc.

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Post-election market movements in rates pushed term rates significantly higher in anticipation of fiscal stimulus, healthcare

reform, tax reform, job growth, etc. (time elapsed … less than six months)

Historical Rates – Post-2016 Election

LIBOR Swap Curve Changes (November 2016 – April 2017)

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From the early signs of difficulties in mid-2006, the Treasury yield curve inverted, presaging not only deceleration in US

economic growth but ultimately a deep recession followed by a prolonged period of near-zero short-term rates.

Historical Rates – Great Recession

Fed Funds / 5-Year Treasury Yield / Annual GDP Growth

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Dot-coms, 9/11 terrorist attacks, recovery, real estate boom …

Historical Rates – Early 2000s


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From recession to the Clinton years, steady, strong growth, high returns …

Historical Rates – 1990s


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Transition from Carter to Reagan, started with 18% mortgages, growth driven in large part by efficiency introduced by

desktop computers…



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Nixon, Ford, and Carter years, volatile decade, oil shocks in 1973-74 and 1979, with the price of oil quadrupling from 1973

to 1974, from $3 to $12 / barrel …



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Over the long haul, volatility, real estate crashes, geopolitical tensions … recent rates have been the lowest in American

history

Historical Rates – 1980 to 2017


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FOMC Voting Member Fed Funds Projections, Median Rates & Market Futures

FOMC Forward Rate Guidance

Source: Bloomberg as of April 28, 2017

Fed governors maintain guidance for two more rate hikes in 2017 and three more in 2018. Market-based futures contracts,

upon which hedge pricing is based, seem to price in a significantly lower trajectory for Fed Funds rates.

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Market-Based Forward Rate Expectations (1 month LIBOR)


1-month LIBOR Forward Curve

Accordingly, market-based LIBOR forward contracts underlying LIBOR-based swaps imply 1.50% LIBOR in mid-2018,

2.00% LIBOR in mid-2020, and 2.50% LIBOR in mid-2024.

CONFIDENTIAL | 13





Labor Market

Unemployment, Nonfarm Payrolls & Average Hourly Earnings

10% unemployment in 2009 has been reduced to 4.5%, while underemployment has been reduced from 17.1% in 2009 to

8.9% today. Average hourly earnings are presently growing at 2.7% above a year ago.

CONFIDENTIAL | 14





US Treasury - Leverage


Treasury Outstandings ($T), GDP in $Blns & Debt/GDP (%)

The aftermath of the Great Recession has been unprecedented peacetime growth in national debt, nearly doubling since

2009. Growth in debt has significantly outpaced GDP growth, shifting leverage from 0.6x to 1.05x in less than a decade.

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Interest Rate Management Considerations

Market Conditions

Liquidity

Growth Strategy

Risk Tolerance

Leverage

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Example Cap Structures

Interest

Rate Cap

$2.02MM upfront premium for an interest rate cap for 5 years on $100MM at 2.00% (equiv. of 42 five year swap bps).

$1.36MM upfront premium for an interest rate cap for 5 years on $100MM at 2.50% (equiv. of 28 five year swap bps).

Allows the client to float with a known maximum rate on the dollars hedged.

Example Swap Structures

Current Starting

Interest Rate Swap

1.82% for a current starting swap for 5 years.

Provides the client with a known rate from a budgeting and planning perspective.

Forward Starting

Interest Rate Swap

1.96% for a 1 year forward starting swap for 4 years.

2.06% for a 2 year forward starting swap for 3 years.

Allows the client to float at a low rate in the near term but also have a known interest expense in the later years when

LIBOR is expected to be higher.

Step Coupon

Interest Rate Swap

5-year step-coupon structure:

1.29% for the first year

1.66% for the second year

1.89% for the third year

2.08% for the fourth year

2.22% for the fifth year

Reduces the initial rate impact to the client, in comparison to a current starting interest rate swap, effectively locks in the

current forward curve and establishes known future rate increases for the company.

Cancellable

Interest Rate Swap

2.02% for a current starting swap for 5 years with the client’s monthly right to cancel the rate protection without penalty

(and still retaining the upside potential) beginning on the 3rd anniversary.

Allows the client to cancel the rate protection without penalty at certain points in the future (can be useful if the debt is

prepaid and/or if rates are lower in the future).

Current Market Structures and Pricing

Assuming core 1 month LIBOR based outstandings with no amortization, an Actual/360 day count basis and monthly interest

payments, a current market swap rate on 1 month LIBOR is…


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Swap Function / Flows

1M LIBOR 1M LIBOR

+ Borrowing Spread

1.82%

Client Pays Fixed Monthly and Receives One Month LIBOR Monthly for 5 Years with No Amortization

Floating-rate

Liability Client

Client Debt Obligation LIBOR + 2.00%

Floating Rate Received in Swap LIBOR

Fixed Rate Paid in Swap 1.82%

All In Rate for Client 1.82% + 2.00% = 3.82%

A floating to fixed interest rate swap is a contractual agreement between the hedge provider and the client to exchange a

series of interest payments for a stated period of time on a schedule of specified notional amounts.

Under a floating to fixed swap:

The client pays fixed rate on notional amount of swap. Notional predicated on debt principal amount to be hedged.

The hedge provider pays floating rate index (LIBOR) on notional amount of swap.

When combined with client’s floating rate payment under the debt obligation, client achieves a known synthetic fixed

rate on exactly the notional amount specified in the swap contract.

Floating to Fixed Interest Rate Swap

Hedge Provider


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Floating to Fixed Interest Rate Swap (continued)

A floating to fixed interest rate swap allows a borrower to effectively convert floating rate debt to fixed rate debt, thus

minimizing exposure to changes in interest rates.

The combination of a floating rate loan and an interest rate swap can provide a borrower with substantial benefits when

compared to a traditional fixed rate loan…

Two-Way Early Breakage - The Borrower receives a gain on the interest rate swap if canceling the rate contract when

market fixed rates are higher than the original swap rate. If replacement rates are lower, there is a cost to cancel the

rate protection early.

Transferable Hedge - The Borrower may apply a swap to any of its loans since the hedge contract is separate from the

debt contract.

Flexible Risk Management - The Borrower has flexibility as to when they enter into rate protection, for what term and on

what amount of their variable rate debt.

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Description Assumptions

Potential Market Value of an Example $100MM 5 Year Non-Amortizing Swap at 1.82%

The analysis below calculates indicative market values of the illustrated spot start swap under various scenarios.

The base case assumes the LIBOR forward curve remains constant and has a shift at the listed valuation dates.

The alternate scenarios shift the LIBOR curve by a given amount, thus shifting the replacement rate, and the market

value of the swap is calculated under those assumptions.

This analysis depicts a few of many possible scenarios. Alternative scenarios available upon request.

Scenario Analysis

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Discussion, Q&A

CONFIDENTIAL | 21





Important notice

Fifth Third Financial Risk Solutions (“FTFRS”) is subject to Commodity Futures Trading Commission (“CFTC”) rules which require FTFRS to

communicate with clients in a fair and balanced manner based on principles of fair dealings and good faith.

The specific risks presented by a particular Swap necessarily depend upon the terms of the Swap and your present and future circumstances. In

general, however, all Swaps involve one or more of the following risks — credit risk, market risk, liquidity risk, funding risk, operational risk, legal and

documentation risk, regulatory risk and/or tax risk. To provide FTFRS clients with a sound basis for evaluating the facts with respect to the Swaps

discussed herein, prior to execution clients are encouraged to review material information disclosed to them during the:

• Onboarding process – ISDA Protocols, Master Agreement & Credit Support Documentation, or the FTFRS Bilateral Dodd Frank Agreement

• Pre-trade negotiations – Contact FTFRS or visit https://www.53.com/resource-center/swap-dealer-disclosures.html

If after review of this presentation and the disclosures referenced herein, you have any questions pertaining to the discussed transaction, please contact

FTFRS.

This document has been prepared by Fifth Third Bank (“Fifth Third”) or one of its subsidiaries for the sole purpose of providing a proposal to the parties

to whom it is addressed in order that they may evaluate the capabilities of Fifth Third to supply the proposed services. It is not intended to provide

specific investment advice and does not constitute either a commitment to enter into a specific transaction or an offer or solicitation, with respect to the

purchase or sale of any swap transaction.

The information contained in this document has been compiled by Fifth Third and includes material which may have been obtained from information

provided by various sources and discussions with management but has not been verified or audited. This document also contains confidential material

proprietary to Fifth Third. Except in the general context of evaluating our capabilities, no reliance may be placed for any purposes whatsoever on the

contents of this document or on its completeness. No representation or warranty, express or implied, is given and no responsibility or liability is or will

be accepted by or on behalf of Fifth Third or by any of its subsidiaries, members, employees, agents or any other person as to the accuracy,

completeness or correctness of the information contained in this document or any other oral information made available and any such liability is

expressly disclaimed.

This document and its contents are confidential and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person in

whole or in part without our prior written consent.

This document is not an offer and is not intended to be contractually binding. Should this proposal be acceptable to you, and following the conclusion of

our internal acceptance procedures, we would be pleased to discuss terms and conditions with you prior to our appointment.

https://www.53.com/resource-center/swap-dealer-disclosures.html







Interest Rate Risk Management Beyond 2009 - 2017c.ymcdn.com/.../2017_4B_Interest_Rate_Risk_M.pdf ·...

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