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Secure Your Rate Today for Future Funding
2018-10-09
Advances and Letters of Credit

October 2018 - FHLBank Atlanta offers a number of structured advance products to help shareholders manage balance sheet positions, interest-rate risk, and expected changes in future liquidity levels. One common scenario shareholders face when planning future funding needs is having a strong current liquidity position but wanting to hedge against future increases in funding costs, potential changes in deposit behavior, and growing loan demand.

An ideal solution for institutions that are flush with liquidity today but still want to manage interest-rate risk and future liquidity positions is FHLBank Atlanta’s Forward Starting advance.

The Forward Starting advance is not one product, but a feature that can be incorporated into many of the Bank’s advances, including the popular Fixed Rate Credit (FRC) advance. With a forward starting structure, shareholders secure a known interest rate today for future funding. Principal is not placed on the borrower’s balance sheet until the forward starting date. Once it has funded, the advance will have all of the features and benefits of the selected structure.

Forward Starting advances offer many benefits, enabling shareholders to:

  • Manage around current excess liquidity concerns and expected deposit runoff
  • Position liabilities today without having to increase balance sheet size
  • Fund long-term loans and securities while reducing interest-rate risk in a rising-rate environment 
  • Fund loans with delayed disbursements, such as construction loans

Reduce Your Interest Expense 
Importantly, compared to funding an advance today, the Forward Starting advance offers potential savings in interest costs because interest does not begin to accrue until the funding date. The following example illustrates savings of two forward starting structures at $5 million notional compared to taking down a seven-year FRC advance immediately.

Advance
$5 million notional

Interest Rate

Total Interest 
Expense

Savings

7-year FRC

 

3.21%

$1,123,500

--

2-year Forward, 5-year FRC

 

3.25%

$812,500

$311,000

3-year Forward, 4-year FRC

 

3.26%

$652,000

$471,500


Because the advance is on the balance sheet for less time than a traditional advance carrying the same term, total interest cost is significantly lower.

In today’s rising-rate environment, Forward Starting advances can offer flexibility in managing liquidity and balance sheet positions while providing interest-rate risk protection. To learn more about how a Forward Starting advance can support your balance sheet management strategies, call your relationship manager or the Funding Desk at 1.800.536.9650, extension 8011.

Additional considerations

  • Pricing and maturity are based on the terms of the specific advance structure selected (FRC, Principal Reducing Credit, etc.). 
  • Collateral is required during the entire life of the advance, including the forward starting period. 
  • Forward Starting advances should only be issued with the good faith intention by the shareholder to fund the advance. Additional fees and limitations apply for terminating the advance transaction before the funding date.

 

The Federal Home Loan Bank of Atlanta is not a registered investment advisor. Nothing herein is an offer to sell or a solicitation of an offer to buy any securities or derivative products. You should consult your own legal, financial, and accounting advisors before entering into any transaction. Advance rates shown are for illustrative purposes only.

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