http://activerain.com/blogs/abnunan en-us http://activerain.com/blogsview/50875/recapitalize-real-estate-to-support-working-capital-and-growth <p>Perhaps you have heard or read about the &quot;inverted yield curve&quot;.&nbsp; This situation has created significant opportunities to refinance debt at lower interest rates since mid to long term rates are lower than short term rates.&nbsp; Allow me to elaborate.</p><p>Let&#39;s start with a few facts:</p><p>First, the current prime rate is 8.25%.</p><p>Second, the five and ten year US Treasury rates (as of 2/28/07)&nbsp;are 4.46% and 4.50%, respectively.</p><p>Third, a significant number of businesses have some level of permanent working capital support in the form outstandings on their line of credit.</p><p>OK, now let&#39;s look at this a little closer.&nbsp; A number of companies have &quot;permanent&quot; or long term borrowings on their lines of credit.&nbsp; This is a dollar figure that they may clean down to during the year, but never seem to be able to pay off.&nbsp; These companies are usually paying a floating interest rate of Prime or Prime + something on the line of credit.&nbsp; Therefore the rate they are paying is probably 8.25% or higher.&nbsp; These companies may also own assets such as equipment or real estate that may not be fully leveraged.</p><p>Banks usually base interest rates for fixed term loans, such as&nbsp;commercial mortgages, as a certain percentage above the comparable US Treasury at the time of closing.&nbsp; The average mark up is around 2% (unrated - non investment grade).&nbsp; Given the facts listed above a 10 year fixed rate would equate to 6.50%. &nbsp;&nbsp;</p><p>Therefore, if a company has the ability to increase the debt level on their&nbsp;real estate they can lock in a long term rate lower than the rate on their line of credit.&nbsp; So why not try to term it out?</p><p>As an example, Company A has a $5 million line of credit with approximately $1 million in &quot;permanent&quot; borrowings on the line, and also owns a $2.66 million commercial building with a $1 million commercial mortgage.&nbsp; By increasing the commercial mortgage to $2 million and paying down the line of credit to zero, they can save at least 1.75% on the amount converted from line to mortgage.&nbsp; On top of that, if the company hasn&#39;t refinanced the commercial mortgage in the last five years they are probably paying a higher interest rate than the 6.50% in this illustration.</p><p>This is the beauty of the inverted yield curve.&nbsp; TAKE ADVANTAGE OF IT WHILE YOU CAN!</p> Al Nunan (North Fork Bank) Wed, 28 Feb 2007 11:25:03 -0600 http://activerain.com/blogsview/50875/recapitalize-real-estate-to-support-working-capital-and-growth