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Advance Restructuring with the Symmetrical Prepayment Advance

By Marianne Cacciola, Financial Strategist

Advance restructuring has allowed members to lower the rate on existing advances by restructuring an outstanding advance and blending the prepayment fee into the rate of a new Classic advance.  Recently, some members have explored the alternative of using the Symmetrical Prepayment advance as the funding vehicle for restructure.  The Symmetrical Prepayment advance has unique prepayment characteristics that may make it a compelling source of flexible, long-term funding because the advance can be prepaid at a gain in certain rising-rate scenarios, and has a lower prepayment fee than a corresponding Classic advance in falling-rate scenarios.

As an example, an outstanding Classic advance, with a rate of 4.30 percent, maturity date of 8/5/2013, and prepayment fee that is 6.82 percent of the advance balance, could be restructured into a new five-year Classic advance with a posted rate of 1.70 percent for a new blended rate of 3.13 percent.  The restructured advance rate would be a reduction of 117 basis points off the current rate while gaining extension of about 39 months beyond the current remaining term. 

For about two basis points more, the five-year Symmetrical Prepayment advance could be used for the replacement funds for an effective yield of 3.15 percent.  A member interested in using the Symmetrical Prepayment advance for restructure is required to "cash settle" the prepay fee of the outstanding advance. Under the Advance Restructure Solution, the prepay fee is blended into the coupon of the new Classic advance.  If using the Symmetrical Prepayment advance, the prepay fee is not "blended" into the coupon, and the member is responsible for the accretion of the prepay fee over the life of the new advance.

The Symmetrical Prepayment advance may benefit a member with a gain if rates rise by 100 basis points or more, assuming instantaneous parallel shifts in the yield curves.  In a rising 300-basis-point scenario, the gain projected on the Symmetrical Prepayment advance could potentially offset some, or all, of the remaining prepayment fee to be accreted from the original restructured advance.  If rates fall, the Symmetrical Prepayment advance would have a lower prepayment fee than a corresponding Classic advance and could potentially be remodified to further reduce the effective yield.

The table below highlights the projected gain in rising rate scenarios compared to the remaining balance of the prepayment fee left to be accreted from the original restructured advance:

Years to Maturity

Prepay Fee balance remaining

 

Up 100 b.p. Projected Gain

Net Gain or

(Prepay fee to be accreted)

 

Up 200 b.p. Projected Gain

Net Gain or

(Prepay fee to be accreted)

 

Up 300 b.p. Projected Gain

Net Gain or

(Prepay fee to be accreted)

5

6.82%

 

4.61%

(2.21%)

 

9.07%

2.25%

 

9.91%

3.09%

4

5.44%

 

2.68%

(2.76%)

 

6.37%

0.93%

 

9.90%

4.46%

3

4.12%

 

1.32%

(2.80%)

 

4.16%

0.04%

 

6.91%

2.79%

2

2.76%

 

0.64%

(2.12%)

 

2.57%

(0.19%)

 

4.45%

1.69%

1

1.35%

 

0.30%

(1.05%)

 

1.28%

(0.07%)

 

2.24%

0.89%

A product description and advance primer is available for the Symmetrical Prepayment advance and the Advance Restructuring Solution.  The primer for the Advance Restructuring Solution contains a link to the webinar, which provides more details on the benefits and accounting guidelines of restructuring an outstanding advance.  The Symmetrical Prepayment advance has a minimum balance of $10 million, and occasional specials are offered to the membership to generate the aggregate minimum. 

For more information see the Advance Restructure Calculator Adobe PDF icon and the Symmetrical Prepayment Advance Estimated Prepayment Fee Table Adobe PDF icon.

For more information on current rate or prepayment indications, please contact your relationship manager or the Money Desk at Office Phone icon 1-800-357-3452. 

 

 
 
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