News
# Interest optimisation of a KfW promotional loan

###
Initial Situation

**Market Overview (06.01.2020):**

**Figure 1: Evolution of 1-month Euribor and 10-year EUR swap rate over time **

### 10-year interest optimisation of a KfW promotional loan

**Product description:**

**Indicative terms and conditions: **

**Figure 2: Cash flows during the 10-year term and at maturity **

**
Figure 3: Difference between cash flows with and without interest optimisation **

**Benefits and risks from a client perspective: **

**Alternative strategy: **

### In a nutshell

The new Geistesblitz “Interest optimisation of a KfW promotional
loan” shows your client an opportunity to further reduce his already
favourable KfW interest rate and thus realise a low interest burden
early on during the term of the loan, without having to wait for KfW to
implement lower client interest rates. In return, he passes on his
redemption bonus to the transferring institution, which only takes
considerable effect at maturity. The solution presented here is only one
of many possibilities for a synthetic loan adjustment. Please contact
us for alternative solutions, other KfW programmes or a change in the
initial client situation.

Jan 7, 2020

For some time now, the continuing low interest rate environment in
the eurozone has been drawing market participants’ attention to longer
maturities of 10 years and beyond. In this context, KfW’s more
favourable (re-)financing options are often integrated into a
comprehensive, tailor-made offer by the intermediary bank.

In addition to an attractive client interest rate, the German
promotional bank KfW offers a redemption bonus. For example, in the case
of KfW promotional loans for real estate a redemption bonus of 5% to
15% is granted under the “Energy-Efficient Construction” programme (No.
153), and as much as 7.5% to 27.5% under the “Energy-Efficient
Renovation” programme (No. 151).

The amount of this redemption bonus is a very welcome support,
reducing the redemption amount (in case of a 5% redemption bonus only
95% of the loan have to be repaid). However, it does not necessarily
meet the applicant’s needs in the best possible way. For this reason,
KfW is considering to further reduce the currently slightly positive
interbank interest rate for the intermediary bank into the negative
range. However, due to technical issues this will most likely not be the
case before autumn this year. Presumably, this will enable a
significant reduction in the client interest rate. But how can
considerable positive liquidity effects be achieved right from the
start?

In the Geistesblitz we use the example of the financing of a new
construction project with 50 micro-apartments to present the possibility
of using a 5% redemption bonus – which would otherwise be only fully
effective at maturity (in this case after 10 years) – to effectively
relieve cash flows from the start as part of an interest optimisation.

- 1-month Euribor: -0,4500% p.a.
- 10-year Swap (client’s rate): 0,1007% p.a.
- Interest difference (10 years – 1 month):
0,5507% p.a.

Your client creates a property with 50 micro-apartments. To finance
these, he uses the KfW programme “Energy-Efficient Construction” (No.
153). He is able to utilise the current upper limit of EUR 100,000 per
housing unit and thus obtain a KfW loan of EUR 5 million. The client
opts for a 10-year term with a 10-year fixed-interest period and bullet
repayment. Since the project is expected to achieve the KfW standard
“Efficiency House 55”, he also plans to receive a redemption bonus of 5%
(EUR 5,000 per unit or EUR 250,000 for the entire project).

We assume that the redemption bonus will be granted in 3 years (after
completion of construction and successful certification). In this case,
it reduces the outstanding loan volume and the interest payments by 5%
from this point in time. However, the main liquidity effect of the
redemption bonus is only achieved at maturity when the client has to
repay only 95% of the notional amount instead of 100%.

Our proposal is to use this redemption bonus to reduce cash flows in
the first years of construction and ramp-up by reducing interest rates.
As a result of the additional interest optimisation concluded with the
intermediary bank, the interest rate will fall from 0.75% p.a. to 0.00%
p.a. in the first three years. This “Bonus Phase” is followed by a “Cap
Phase” until maturity, in which the client pays the 1-month Euribor plus
an interest premium of 1.10% p.a., but pays a maximum of 0.75% p.a.
(known as fixed rate in the KfW loan). Thus, after a guaranteed interest
relief, the client has the opportunity to participate in possibly still
low interest rates through a conditional interest relief.

In return, the client “waives” the redemption bonus. At maturity, he
repays 100% of the notional amount to the transferring bank, which
passes 95% on to KfW. The intermediary bank retains the remaining 5% to
forward it to the interest optimisation in order to finance the previous
interest relief for the client. The transfer of the redemption bonus
from the client to the bank is purely synthetic. The underlying KfW loan
remains unaffected by the synthetic loan adjustment.

Maturity: 10 years starting 31.01.2020

Payments: monthly, act/360

Client receives: 0.75% p.a. (30/360 analogous to KfW)

Client pays Bonus Phase (years 1 to 3): 0.00% p.a.

Cap Phase (years 4 to 10): 1-month Euribor plus 1.10% p.a., max. 0.75% p.a.

Redemption bonus: The client “waives” KfW’s redemption bonus in
favour of the intermediary bank, by contributing it to the interest rate
optimisation. At maturity he repays the original notional amount of
100% (95% to amortize the loan and 5% for the interest optimisation).

Reference notional: The client receives from the swap transaction the
interest rate of the KfW loan on the notional amount reduced by 5%
after year 3 (expected accounting of the redemption bonus). However, he
continues to pay its interest rate on the original

notional amount of
100%.

The following chart shows the difference in cash flows between an
isolated KfW loan and a KfW loan with interest optimisation as described
above over the 10-year term. On the left hand side a guaranteed
interest saving for 3 years is shown. In the following years there is a
potential interest saving for 7 years (the extent of which is unknown
today). On the right hand side (at maturity) the negative liquidity
effect due to the 5% redemption bonus is shown.

Benefits:

- In the first three years (Bonus Phase), your client pays 0.00% p.a. instead of 0.75% p.a., achieves an interest reduction of 0.75% p.a. on the full notional amount and can therefore already collect 45% of the redemption bonus during the construction and ramp-up period of the project (0.75% x 3 years = 2.25% of the notional amount; the redemption bonus amounts to 5%).
- In the following seven years (cap phase), the client pays the 1-month Euribor plus 1.10% p.a., but not more than the fixed rate of the KfW loan of 0.75% p.a.

- In favour of the Bank, your client waives the redemption bonus of 5%, which would otherwise be fully liquidity-effective at maturity (after 10 years). The 5% of the notional amount must also be paid if KfW’s redemption bonus does not materialise in case the required conditions for disbursement are not fulfilled.
- In the cap phase, the client pays 0.75% p.a. on the original notional instead of the notional reduced by 5%. This corresponds to a waiver of an effective interest rate reduction of approx. 04% p.a. (or 5% of 0.75% p.a.).

Instead of a Bonus Phase followed by a Cap Phase, a 10-year Bonus
Phase would also be conceivable. In the case of a uniform interest rate,
the client would receive 0.75% p.a. for 10 years (on the notional
amount reduced by the redemption bonus) and pay 0.33% p.a. in return (on
an unchanged notional amount). Doing so, the 5% redemption bonus would
be transferred into a guaranteed interest rate reduction over the entire
10-year term.

News

Feb 25, 2020

So much more than a new website. Today, the completely revised homepage www.l-p-a.com went live, marking the official launch of the new brand identity of the LPA Group. In terms of both its content and its visual impact, the homepage communicates the positioning and ambition of the Group, while at the same time sharpening the Group’s corporate identity. The LPA Group is positioning itself as a rapidly growing, global leader in CapTech. The aim can be expressed as: Be #1, be #ONE. This means not only being a global leader in CapTech, but also presenting ourselves as ONE company.

News

Feb 24, 2020

Die Kommunen in NRW erhalten einen weiteren digitalen Zugang zu Förderkrediten der NRW.BANK: Die Förderbank für Nordrhein-Westfalen kooperiert ab sofort mit der digitalen Kreditvermittlungsplattform komuno. Der integrierte komuno-Förderfinder zeigt der Kommune dabei an, welche Fördermittel der NRW.BANK für ihren aktuellen Bedarf in Frage kommen.

News

Feb 18, 2020

Following the acquisition of the Swiss FinTech AAAccell at the beginning of the year, the LPA Group is expanding its presence in Switzerland