Interest Rate 'Caps'

							 Interest Rate ‘Caps’
     Overview
   Purpose           :                  Protect yourself from higher interest rates on your borrowings
   Flexibility       :                  You Select your ‘Cap’, or your max interest rate, and length of time of cover
   Payments          :                  Receive the difference between market interest rates and your ‘Cap’ level
   Premium           :                  Once off payment provides cover for 3 / 5 / 7 years at selected rate
   Independent       :                  ‘Cap’ is not tied to a property or specific bank loan
   Bank Margins      :                  No requirement to alter your existing (low) bank margins
   Risk              :                  Loss of premium if interest rates do not exceed your ‘Cap’ level.


   What is an interest rate ‘Cap’ ?
An interest rate ‘Cap’ is a derivative that seeks to protect investors from higher interest rates in the future. Investors
purchase a ‘Cap’ with an upfront premium, selecting a maximum level of interest rates and for a specified term. In
return investors shall receive a series of quarterly payments once market interest rates exceed the selected ‘Cap’ level.


  How does the ‘Cap’ operate ?
                                                                 With No ‘Cap’ in place, the cost of borrowings
                                                                 rise as interest rates rise




                                                                    Interest Cost ‘Cap’ at 3.5% limits the
                                                                    impact of higher interest rates in future



As interest rates rise, (reference to 3 month Euribor), and exceed the ‘Cap’ level of 3.5%, the ‘Cap’ pays investors the
difference between these interest rates. Payments are calculated on a daily basis and payable quarterly to investors.
For example a 3.5% ‘Cap’ would pay 2% of the nominal amount when rates reach 5.5%. Note the ‘Cap’ level is
exclusive of the margin payable by investors on their existing bank borrowings.



  Cost of the ‘Cap’ ?
The premium or cost of the ‘Cap’ is calculated and paid for upfront. The drivers of the cost are the term of the cover
and the level of the interest rate selected. The longer the term of the cover the more expensive the ‘Cap’, and the lower
the interest rate the more expensive the premium.


                         Warning: Investors may lose the premium invested if interest rates
                               do not exceed the level of the ‘Cap’ over its term.
Interest Rate ‘Caps’
     Interest rates to rise ?
Our belief is that interest rates are currently too low, and that given a choice central banks would have rates at levels far higher
than are prevailing at present. Quantitative easing, expanding US money supply, coupled with lower interest rates has in our
opinion kick started this process in the form of higher commodity prices. We believe that this will in time feed into higher
interest rates as occurred in response to stimulus packages and inflation post the 1987 Stock Market Crash.

Euro Rates at 0.8% from 5.4% in Sept 2008                                     1989 German Rates from 3.5% to over 10%




                                                                                                                                                  Source Bloomberg




What next for interest Rates ?
   •Source Bloomberg*
   •Past Performance is not an indicator of future performance. The value of your investment may go down as well as up.


     Advantages of ‘Cap’ versus Fixed Rates
  Protection              :                       Protection from higher interest rates on your borrowings
  Flexibility             :                       Tailor the Cap’ to limit cash flow implications of higher rates
  Margins                 :                       No renegotiation of bank margins from low level to ‘new’ margins of 2-3%
  Cash Flow               :                       No immediate rise in interest costs, which remain low while rates are low
  Termination             :                       Potential to sell the ‘Cap’ at market prices before maturity



 Disadvantages of ‘Cap’ versus Fixed Rates

  Premium                 :                       If rates do not exceed your ‘Cap’ the premium is not refunded
  Your bank               :                       Your bank is not involved in the ‘Cap’
  Margin                  :                       Your bank may renegotiate your margin in the future and dilute the ‘Cap’
  Termination             :                       Early termination may result in a loss of premium
 Cost of the ‘Cap’ ?
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