Swap Agreement

8/8/2019 Swap Agreement

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The information contained herein has been compiled from a variety of sources believed to be reliable. We do notguarantee such information or make any representation as to its accuracy. This publication is intended to provide generalinformation regarding capital markets and financing matters and is not intended nor should it be construed, to providelegal, accounting or financial advice. Securities and Investment Banking Services are offered through CIT CapitalSecurities LLC, an affiliate of CIT.

Interest Rate Swap

Product Disclosure Statement

A Product Disclosure Statement is an informative document. The purpose of a Product DisclosureStatement is to provide you with enough information to allow you to make an informed decisionabout a products suitability for your needs. A Product Disclosure Statement is also a tool for

comparing the features of other products you may be considering. If you have any questionsabout this product, please contact us on any of the numbers listed at the end of this ProductDisclosure Statement.

Important Information

This Product Disclosure Statement is issued by CIT Capital Markets Risk ManagementProducts Desk (CIT) and is current as ofJanuary 18

th, 2008. The information contained herein

is subject to change. CIT will provide updated information by issuing a replacement ProductDisclosure Statement.

The information contained in this document is general in nature. It has been prepared without

taking into account your objectives, financial situation or needs. Because of this, you should,before acting on this information, consider its appropriateness to your objectives, financialsituations and needs. By providing this Product Disclosure Statement, CIT does not intend toprovide financial advice or any financial recommendations. You should read and consider thisProduct Disclosure Statement in its entirety and seek independent expert advice before making adecision about whether or not this product is suitable for you.
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The information contained herein has been compiled from a variety of sources believed to be reliable. We do notguarantee such information or make any representation as to its accuracy. This publication is intended to provide generalinformation regarding capital markets and financing matters and is not intended nor should it be construed, to providelegal, accounting or financial advice. Securities and Investment Banking Services are offered through CIT CapitalSecurities LLC, an affiliate of CIT

Interest Rate Swap

Counterparty CIT Lending Services Corporation (CIT, we or us.)Purpose What is a Swap?

An Interest Rate Swap (Swap) is an interest rate managementtool for customers who have financing arrangements that aresubject to changing interest rates, for example, a LIBOR basedfacility.

A Swap is not a lending facility. It is an interest rate managementtool that can be used in conjunction with any variable rate lendingfacility, including a facility with another lender. Your underlyinglending facility will continue to be governed by the terms andconditions set out in your facility agreement.

It is also important to remember that a Swap only affects thebase interest rate applicable to your underlying lending facility. Ithas no effect on any acceptance or other fees and marginspayable under that facility. You remain obligated to pay thosefees and margins no matter what happens with the Swap. Forthat reason, this document does not consider or take intoaccount any fees and margins payable in respect of yourunderlying lending facility.

Suitability Do I have sufficient knowledge about this product?A Swap may be suitable if you have a good understanding ofinterest rate markets and would like to manage your interest rate

exposure.

If you are not confident about your understanding of these items,we suggest you seek independent advice before making adecision about this product.

Description All Swaps involve a variable and a fixed rateA Swap is an agreement between you and CIT where one partyagrees to pay the other (in cash) the difference between a fixedinterest rate (Swap Rate) and a series of variable interest ratesover an agreed period of time. The fixed interest rate isestablished at the beginning of the transaction, while the variablerate is a Reference Rate determined on period Reset Dates.The variable Reference Rates used for most swaps are LIBOR orPRIME (see the market reference rate section for moreinformation.)


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and a Payer and a ReceiverA Swap is based on an agreed notional amount (the Principal). Itusually involves the exchange of a fixed for a floating rate (fixedfor floating).In every fixed for floating Swap transaction, one person wants topay a fixed interest rate (the Payer) and the other wants toreceive that fixed payment (the Receiver). The motivation of thePayer in a fixed for floating Swap is to transform an underlyingvariable interest rate into a fixed rate obligation, and vice-versafor the Receiver.

How does it work?At each reset date:

if the Reference Rate is greater than the Swap Rate, then thePayer will receive a cash payment from the Receiver basedon the difference between the Reference Rate and the Swap

Rate if the Reference Rate and the Swap Rate are the same, there

is no exchange of payments

if the Reference Rate is less than the Swap Rate, then theReceiver will receive a cash payment from the Payer basedon the difference between the Swap Rate and the ReferenceRate.

The following diagram summarizes the variable and fixed ratepayment obligations of a Payer and Receiver in a fixed forfloating Swap. It assumes that the Reference Rate is LIBOR.

Customer Loan paymentLIBOR + SPREAD

Fixed LIBOR


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Periodic settlementSettlement occurs on every Reset Date and the relevant amountis paid at the end of the interest rate period (in arrears). If you aremaking a payment, you must do so according to CITsinstructions. CIT will make all payments to a bank accountselected by you.

There is no exchange of principal only exchange of interestNeither party commits to the exchange of Principal amounts. Thenotional Principal remains constant throughout the life of theSwap (unless an amortization or accretion schedule is built intothe Swap).

Reset (or rollover) DatesReset Dates (or rollover dates) divide the term of your underlyingexposure into equal intervals (usually quarterly or monthly) called

Calculation Periods.Cost of product Cost of product

There are no fees or other direct costs associated with a Swap.The price of the Swap is simply the fixed rate of interestapplicable to the Swap. When setting the fixed rate of interest,CIT takes into account a variety of factors, including:

the amount of the Principal, the term of the Swap, theReference Rate and the reset or payment frequency

inter-bank market rates prevailing at the time, and

market volatility

CIT derives a financial benefit from entering into a Swap. CITobtains that benefit by incorporating margins into the rates it setsfor Swaps. By that we mean that the agreed upon rates for aSwap will be different to the base market interest rates prevailingat the time. In effect, you pay for the Swap by accepting the fixedinterest rate quoted by CIT.

Advantages/benefits Advantage/benefits A Swap is flexible. It allows you to tailor the Principal,

payment frequency and maturity to suit your financing

arrangement.

A Swap allows you to manage interest rate risk withoutaffecting the financing arrangement.

There is no upfront premium.

Disadvantages/risks Disadvantages/risks You effectively lock in a fixed interest rate. This means you


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cannot participate in favorable interest rate movements.

Early termination may incur a breakage cost subject tomarket movements (see Early termination section).

We generally have performance obligations under all thefinancial products into which we enter. Customers depend onus to perform our obligations. Our ability to do so is linked to

our financial well-being. This type of risk is commonly referredto as credit or counterparty risk. As we are an A rated credit,the risk of us failing to perform is very low.

Early termination Can I terminate a Swap before maturity? You may ask us to terminate a Swap at any time up to thematurity date. CIT will provide you with a quote for canceling theSwap.

What will the value of a Swap be upon early termination?Our quote will incorporate the same variables (amount of the

Principal, term of the Swap, Reference Rate, and reset orpayment frequency) used when pricing the original Swap. Thesewill be adjusted for prevailing market rates over the remainingterm of the Swap.

We will also need to consider the cost of reversing or offsettingyour original transaction. When doing this, CIT takes into accountthe current market rates that apply to any such offsettingtransactions.

What happens if I accept?If you accept the termination quote, the Swap will be cancelled.

You should appreciate that you may lose money as a result ofearly termination.

Credit approval Credit approvalBefore entering into a Swap, CIT will assess your financialposition to determine whether or not your situation satisfies ournormal credit requirements. CIT will advise you of the outcome ofits review as soon as possible.

If your application is successful, you will need to enter into theappropriate agreements as defined by the International Swapsand Derivatives Associations (ISDA) documentation.

Documentation Documentation You will be required to sign a standard master agreement. TheISDA Master Agreement is multicurrency, cross border agreementthat comprehensively covers all of the terms and conditions ofone or more derivative transactions. This is the industry standarddocumentation.


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The ISDA Schedule to the Master Agreement covers all of thespecifics between you and CIT. Both this document and theMaster are drafted by CIT, or its counsel.

Each of the above documents governs the dealing relationshipbetween you and CIT and set out the terms and conditions that

apply to all transactions that we enter into with you. In particular,they document the situations where those transactions can beterminated and the way the amount payable followingtermination is calculated.

We will provide you with your own copy of each of thesedocuments and we strongly recommend that you fully considertheir terms prior to entering into any transaction. You shouldobtain independent advice if you do not understand any aspect ofthe documents.

ConfirmationShortly after entering into a Swap, CIT will send you aconfirmation that outlines the economic terms of the transaction.This confirmation will need to be signed by you and returned toCIT.

It is extremely important that you check the confirmation tomake sure that it accurately reflects the terms of the transaction.In the case of a discrepancy, you will need to raise the matterwith your CIT contact as a matter of urgency.

The marketReference Rate

The market Reference RateThe Reference Rate provides a benchmark interest rate. The

market Reference Rates that are commonly used are USD LIBORor its foreign counterparts.

Where the variable interest rate applicable to the underlyingfinancing agreement is not referable to LIBOR, the ReferenceRate used for the Swap will be different. The Reference Rate willcorrespond to the variable rate applying to the underlyingfinancing arrangement.

Example ExampleThe example below is indicative only and uses rates and figuresthat we have selected to demonstrate how the product works. Inorder to assess the merits of any particular Swap, you would needto use the actual rates and figures quoted to you at the time.(Note that the calculations below include rounding of decimalplaces.)


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Scenario You are a borrower with a 3 year US Dollar ($) 10,000,000variable rate LIBOR based facility, which rolls over on a quarterlybasis at the prevailing 3 month LIBOR rate. In the currenteconomic environment interest rates look as though they will berising and your borrowing costs may exceed 5.00%. You wouldlike to lock in your borrowing costs at the current Swap rate of5.00%.

To hedge against the risk of interest rates rising, you elect toenter into a 3 year Swap with CIT to pay a fixed interest rate of5.00% (the Swap Rate) on a Notional Principal of $10,000,000quarterly Reset Dates and 3 month LIBOR as the Reference Rate.

For the purposes of this example, assume that there are 90 daysin the quarter.

If 3 month LIBOR is above 5.00%Assume that 3 month LIBOR is 6.00%. The variable base ratethat would apply under your LIBOR based facility would then be6.00%. However, as you have entered into a Swap with CIT with aSwap rate of 5.00%, CIT will compensate you for the differencebetween LIBOR and the Swap Rate. Therefore, you receive anamount based on the difference of 1.00%. This amount offsetsthe increased base amount payable under your underlyingfacility, which has risen by 1.00%. This effectively means youhave locked in your base interest rate at 5.00%. This process is

repeated on each quarterly Reset Date.

CIT uses the following formula to determine the amount payablewhere the financing arrangement is a LIBOR based facility.

Floating Amount:Floating Amount = Notional Principal x Reference Rate(%) x Actual/360

Fixed Amount:Fixed Amount = Notional Principal x Fixed Swap Rate(%) x Actual/360

Where Actual means the actual number of days in the CalculationPeriod.

The difference between the Floating and Fixed Amounts(depending on whether it is positive or negative number) will bepaid either by you or by CIT.

Below is a simple way to calculate the amount payable. Using thefigures in the example, this is calculated as follows:


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Amount payable at Reference Rate:Fixed Amount = $10,000,000 x 5.00% x 90/360

= $125,000.00

Amount received at Swap Rate::Floating Amount = $10,000,000 x 6.00% x 90/360

= $150,000.00

The payment CIT makes to you is the difference between theabove amounts, that is:

$150,000.00 - $125,000.00

$ 25,000.00

If 3 month LIBOR is below 5.00%If 3 month LIBOR is below 5.00% (for example, 4.50%) then thevariable base interest rate that would apply under your underlyingfacility would be 4.50%. However, as you have entered into aSwap with CIT at a Swap Rate of 5.00% you will need tocompensate CIT for the difference between the 3 month LIBORrate and the Swap Rate. This will result in a cost to you becauseyou have agreed to forego favorable interest rate movements andhave locked in your interest rate at 5.00% (the Swap Rate).

Based on the above, the amount payable in this example wouldbe as follows:

Amount payable at Reference Rate:Fixed Amount = $10,000,000 x 5.00% x 90/360

= $125,000.00

Amount received at Swap Rate::Floating Amount = $10,000,000 x 4.50% x 90/360

= $112,500.00

The payment made by you to CIT is the difference between theabove amounts, that is:

$112,500.00

- $125,000.00($ 12,500.00)

What if 3 month LIBOR is the same as the Swap Rate?If 3 month LIBOR remains at 5.00%, no amount is payable underthe Swap for the period. Your base interest rate would remain at5.00%.


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The chart below illustrates the aforementioned calculations:

Taxation TaxationTaxation law is complex and its application will depend on yourcircumstances. When determining whether or not this product issuitable, consider the impact it will have on your taxation positionand seek professional advice on the tax implications it may havefor you.

Factors that mayinfluence our advice

Factors that may influence our adviceThis document has been designed to help you choose the rightproduct for your needs. When you ask for a recommendation,please be assured that our professionals will always explain yourchoices and suggest a suitable product.

CIT Contact Details Peter PhelanManaging Director(212) 771-9623

[email protected]

Jim BeattieAnalyst

(212) 771-1779

[email protected]

LIBOR

Market Interest Rate

Swap Interest RateCost

fFunds

Underlying Interest Rate at Reset DateYou pay CIT if

Reference Rate < Swap Rate

CIT pays you if

Reference Rate > Swap
mailto:[email protected]:[email protected]

Swap Agreement

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