Advance restructuring allows a member to embed the prepayment fee on an existing advance into the rate on a new advance rather than paying FHLB Des Moines the prepayment fee at the time of the advance termination. The prepayment fee is blended into the rate on the new advance and paid over the lifetime of the new advance.
Benefits of Advance Restructuring
- For liability sensitive members, extend duration of advances without increasing outstanding advance balance
- Likely to result in a lower rate on a new advance compared to the old advance rate
- Take advantage of the historically low interest rate environment
- Improve net interest margin
- Work directly with Bank staff at no cost as the Bank does not promote nor endorse any third party vendor or consultant with regard to advance restructuring initiatives
- Existing advance must be a long-term, fixed rate bullet advance or a convertible advance (regular and Community Investment Advance)
- Can only restructure into a long-term, fixed rate bullet advance (regular and Community Investment Advance)
- Cannot restructure an existing advance in conjunction with a Unique Funding Opportunity offered by the Bank
Members must determine if the restructuring would be accounted for as a debt modification or extinguishment which includes, but is not limited to:
- Determining if there is a substantial difference between the two instruments and
- Comparing the present value of the two instruments by using the coupon rate on the old advance as the discount rate
- Extinguishment - present values differ by 10 percent or more, then prepayment fee booked as a one time expense
- Modification - present values differ by less than 10 percent, then prepayment fee accreted over the term of the new advance
Note: FHLB Des Moines does not offer nor provide any accounting guidance with regard to advance restructuring, the appropriate accounting treatment or possible accounting implications. Members should consult with their own internal and/or external accountants and/or auditors prior to entering into an advance restructuring transaction.
How to Restructure an Advance
Money Desk will calculate the “blended rate” for differing term to maturity scenarios.
Settlement is two business days.