How can a borrower hedge their Variable Spread Loans without converting them to Fixed Spread Loans?
If a borrower does not wish to convert a Variable Spread Loan into a Fixed Spread Loan, then an interest rate swap or an interest rate cap or collar would only be against the LIBOR component of the lending rate. This is because the Variable Spread Loan’s spread changes every six months based on IBRD’s borrowing cost and cannot be replicated or offset with any risk management instrument available in the market.
