Interest Rate Caps

An interest rate cap can be seen as insurance against your interest costs rising above an agreed maximum level, known as the Cap Rate.

You pay a one-off initial premium to buy the cap.  After that, you get long-term protection against high interest rates, because the cap will pay you extra income when interest rates are high.

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If interest rates rise above the Cap Rate, then you will receive compensating payments under the cap, keeping your net interest costs at or below the agreed maximum.

An important advantage of a cap compared to a fixed rate loan is that the cap does not oblige you to pay a fixed minimum rate of interest. With a cap, if interest rates stay low (or fall), then your borrowing costs will stay low (or fall) accordingly.

Another important advantage of a cap is that it may be terminated at any time without penalty, for example if you repay your loan early. With fixed rate loans, the fees for early termination can be substantial.

Cap-It believes that interest rate caps are the only suitable hedging option for most small and medium-sized borrowers. This is because many such borrowers lack the financial expertise, risk-management systems and derivatives trading facilities which are necessary to understand, measure and control the risks of fixed rate products.

A cap is a flexible product, not tied to any particular loan and free from the hidden dangers of fixed rate instruments. A single cap can protect a pool of underlying borrowings for a period of up to ten years.

You pay a one-off initial premium to purchase the cap. That is the only payment you will make during the cap’s lifetime. After that, all future payments (if any) under the cap contract will be in your favour.

The cap contract will specify the amount of borrowing to be protected, the duration of that protection and the agreed cap rate, which is the level of the reference interest rate above which the cap protection kicks in. The reference interest rate is normally either LIBOR or the Bank of England Base Rate. The cap contract will also specify the payment dates of the cap, which are normally every month or every quarter.

On every monthly or quarterly payment date during the lifetime of the cap, if the reference interest rate is higher than the cap rate, then you will receive a payment to compensate for you the extra interest incurred during that period. If the reference interest rate is equal to or lower than the cap rate, then you will receive no payment for that period.

If you wish to terminate the cap early, you may receive a redemption payment from the cap seller to compensate you for the value of the remaining life of the cap. That redemption payment may be zero, for example if the cap only has a short while left to run. But in any event, provided that you have already paid the initial premium, you will never have to pay a break fee to exit the cap early.

Example 1

You pay a one-off initial premium to purchase the cap. That is the only payment you will make during the cap’s lifetime. After that, all future payments (if any) under the cap contract will be in your favour.

Example 1

You pay a one-off initial premium to purchase the cap. That is the only payment you will make during the cap’s lifetime. After that, all future payments (if any) under the cap contract will be in your favour.

Example 1

You pay a one-off initial premium to purchase the cap. That is the only payment you will make during the cap’s lifetime. After that, all future payments (if any) under the cap contract will be in your favour.

Much like an interest rate cap, a Cap-It Certificate can be viewed as insurance against your interest costs rising above an agreed maximum level, also known as the Cap Rate.

You pay a one-off initial premium for the Cap-It Certificate in exchange for long-term protection against high interest rates.

Cap-It Certificates provide you with extra income when interest rates are high.  If interest rates rise above the Cap Rate, then you will receive compensating payments under the Cap-It Certificate, keeping your net interest costs at or below the agreed maximum.

No. A Cap-It Certificate is a non-negotiable debenture which corresponds to an interest rate cap.

A cap will protect you from the effects of higher interest rates by providing you with additional income when interest rates rise above the cap rate.

The cap will also allow you to enjoy the benefit of lower interest rates, because it does not commit you to paying a fixed minimum rate.

Borrowers owning interest rate caps tend to be more attractive to lenders, because there is less risk that they will be unable to meet loan payments when interest rates rise. The cap provides them with extra income when it is most needed.

Interest rate caps are separate contracts from the borrowings they protect. If you own a cap, you have the flexibility to rearrange your loans without having to adjust the cap. Similarly, you can cancel or modify your cap without needing to restructure your borrowings.

Another important benefit of a cap is its simplicity. You pay a single initial premium to buy the cap. After that, the cap gives you long-term and flexible protection for a pool of borrowings.

Perhaps the most important benefit of a cap is that it does not expose you to the dangers of fixed rate products.

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If, for a given calculation period, the reference interest rate is above the cap rate, then you will receive a payment amount under the cap.

The amount that you will receive will be the difference between the reference interest rate and the cap rate multiplied by

(i) the notional amount protected by the cap and

(ii) the sum of the number of calendar days in the calculation period divided by 365.

When expressed as a mathematical formula, the payment is calculated as follows:

Terms:

P = payment amount

N = notional amount protected by the cap

R = the level of the reference interest rate for the calculation period, expressed as an annual percentage

C = the cap rate, expressed as an annual percentage

d = the number of calendar days in the calculation period

 

Formula

If R<=C, then P=0
If R >C, then P=(R-C) x N x d/365

There are no risks associated with an interest rate cap. The worst that can happen is that the cap buyer pays a premium for the cap but receives no payments in return, for example if interest rates do not rise above the cap rate during the life of the contract.

The amount of initial premium payable for a cap depends upon factors including the amount of borrowing to be protected, the duration of that protection and the agreed cap rate.

The greater the amount protected and the longer the duration of the protection, the higher the cost of the cap; the lower the agreed cap rate (i.e. the earlier the cap protection will kick in), the higher the cost of the cap.

The precise cost of any given cap will depend upon market forces at the time of the cap purchase.
For an indication of current prices, please click here.

A number of UK and international banks will offer caps to their larger customers, for example those customers having borrowings of £100 million or more.

But banks are typically less willing to trade in caps with smaller customers. Caps in smaller denominations tend either to be unavailable or else to be priced significantly higher than the normal market prices.

Cap-It was established to provide small and medium-sized borrowers with access to interest rate cap protection in the form of Cap-It Certificates. Cap-It Certificates are transparently priced and provide interest rate cap protection for smaller borrowers who might otherwise lack access to caps.

A number of UK and international banks will offer caps to their larger customers, for example those customers having borrowings of £100 million or more.

But banks are typically less willing to trade in caps with smaller customers. Caps in smaller denominations tend either to be unavailable or else to be priced significantly higher than the normal market prices.

Cap-It was established to provide small and medium-sized borrowers with access to interest rate cap protection in the form of Cap-It Certificates. Cap-It Certificates are transparently priced and provide interest rate cap protection for smaller borrowers who might otherwise lack access to caps.

Cap-It Certificates

A Cap-It Certificate is a non-negotiable debenture issued by the Cap-It Issuer that will:

(i) record the terms under which payments will be made to the Certificate Holder by the Issuer; and

(ii) provide evidence of the Cap Investment

Much like an interest rate cap, a Cap-It Certificate can be viewed as insurance against your interest costs rising above an agreed maximum level, also known as the Cap Rate.

You pay a one-off initial premium for the Cap-It Certificate in exchange for long-term protection against high interest rates.

Cap-It Certificates provide you with extra income when interest rates are high.  If interest rates rise above the Cap Rate, then you will receive compensating payments under the Cap-It Certificate, keeping your net interest costs at or below the agreed maximum.

You pay a one-off initial premium to purchase the Cap-It Certificate.  That is the only payment you will make during the Cap-It Certificate’s lifetime.  After that, all future payments (if any) under the Cap-It Certificate will be in your favour.

The Cap-It Certificate will specify the amount of borrowing to be protected, the duration of that protection and the agreed Cap Rate, which is the level of the reference interest rate above which the cap protection kicks in. The reference interest rate is either LIBOR or the Bank of England Base Rate.  The Cap-It Certificate will also specify the payment dates, which can be monthly, quarterly, semi-annually, or annually.

If the reference interest rate is higher than the cap rate, then you will receive a payment to compensate for you the extra interest incurred during that period.  If the reference interest rate is equal to or lower than the cap rate, then you will receive no payment for that period.

If you wish to terminate a Cap-It Certificate early, you may receive a redemption payment from Cap-It to compensate you for the value of the remaining life of the Cap-It Certificate. Early redemption of a Cap-It Certificate is at Cap-It’s sole discretion. The redemption payment may be zero, for example if the Cap-It Certificate only has a short while left to run.

You will never have to pay a break fee to exit the Cap-It Certificate.

About Cap-It

Cap-It provides interest rate cap protection for small and medium-sized businesses and individuals having variable rate loans.

Borrowers wishing to purchase cap protection may subscribe to a Cap-It Certificate structured to match their individual requirements, including:

    • the amount of borrowing to be protected;
    • the duration of that protection; and
    • the maximum rate of interest payable.

 

 

Not required? 

Subscribers may also specify the Reference Interest Rate (Base Rate or LIBOR) of their Cap-It Certificate, as well as its Payment Frequency (monthly or quarterly).

Cap-It believes that interest rate caps are the only suitable interest rate hedging product for smaller borrowers

Mis-selling of interest rate swaps and other fixed rate products.
Caps the only appropriate IRHP for most small and medium borrowers.

Many small and medium borrowers lack access to caps

Cap-It does not charge any fees to the purchasers of Cap-It Certificates.

(Align with fee explanation in documents)

Whenever it issues a Cap-It Certificate, Cap-It purchases a corresponding cap investment from one of a panel of high-grade international banks. Cap-It earns a transparent commission from the difference between the purchase price of the cap investment and the issue price of the Cap-It Certificate

Risks

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Glossary of Terms

Basis Point

One basis point is one hundredth of one percent, or 0.01%.

Business Day

A day other than a Saturday or Sunday on which commercial banks are open for business in London.

Calculation Agent

Cap‐It Financial Limited, as defined and appointed under the Management Services Agreement, and its Successors.

Calculation Notice

The notice sent to the Certificate Holder by the Issuer specifying a Payment Amount, if any, for a given Payment Date.

Calculation Period

The period from and including one Reference Date to, but excluding, the next following Reference Date, as defined in the Conditions.

Cap Rate

The level of the Reference Interest Rate above which a Payment Amount will be triggered.

Cap‐It Certificate

A non‐negotiable debenture issued by the Issuer that will record the terms under which Payment Amounts, if any, will be made to the Certificate Holder by the Issuer.

Certificate Holder

The Subscriber and holder of a Cap‐It Certificate in whose name such Cap‐It Certificate is for the time being registered in the Transaction Register.

Conditions

The terms and conditions in respect of the Cap‐It Certificates, substantially in the form set out in Schedule 1 to the Deed Poll.

Confirmed Certificate Terms

The additional provisions relating to a Cap‐It Certificate, substantially in the form of Schedule 2 to the Deed Poll.

Deed Poll

The Deed Poll made by the Issuer on 19 June 2019  (as may be further modified or supplemented from time to time).  Each Cap‐It Certificate issued by the Issuer is constituted by, subject to, and has the benefit of the Deed Poll and the Conditions.

Designated Maturity

The time period for which the Reference Interest Rate is quoted. Cap‐It Certificates will normally have a Designated Maturity of either one (1) month or three (3) months, although Designated Maturities of six (6) months or twelve (12) months may also be available.

Early Redemption Amount

The net Proceeds, if any, of the relevant Cap Investment less the Redemption Fee payable on the Early Redemption Date to the Certificate Holder.  The Early Redemption Amount shall not be lower than zero.

Early Redemption Date

The Business Day specified as such by the Issuer following a payment of any Proceeds in relation to the relevant Cap Investment pursuant to Condition 12 (Early Redemption), or such date designated as such following an Event of Default pursuant to Condition 19 (Events of Default).

Fixed Rate

An interest rate which does not vary during the life of a transaction.

Floating Rate

An interest rate which is reset at predetermined intervals by reference to a market reference rate (such as LIBOR).

Interest Rate Cap

An interest rate cap can be seen as insurance against your interest costs rising above an agreed maximum level (the Cap Rate).  You pay a one-off initial premium for the cap in exchange for long-term protection against high interest rates.

The cap provides you with extra income when interest rates are high.  If interest rates rise above the Cap Rate, then you will receive compensating payments under the cap, keeping your net interest costs at or below the agreed maximum.

Issue Date

Each date on which a Cap‐It Certificate is issued as provided for in these Conditions and specified as such in the Confirmed Certificate Terms.

Issue Price

The payment made pursuant to a Subscription Agreement to the Issuer by a Subscriber wishing to purchase a Cap‐It Certificate in order to become a Certificate Holder.

Issuer

Cap‐It Issuer Limited, a company incorporated under the Laws of England, whose registered address is New Bridge Street House, 30‐34 New Bridge Street, London EC4V 6BJ.

Issuer Spread

The difference between (i) the Proceeds receivable by the Issuer from the Underlying Counterparty pursuant to the Cap Investment, and (ii) the Payment Amount payable by the Issuer to the Certificate Holder under a Cap‐It Certificate on a given Payment Date.  The Issuer Spread reflects the difference of 0.1% between the Cap Rate applicable to the Cap Investment and the (higher) Cap Rate applicable to the associated Cap‐It Certificate.

LIBOR

The London Interbank Offered Rate for pounds sterling deposits, that is the rate at which banks in London can borrow from one another over a stated period of time (the Designated Maturity), as published daily at 11:55 a.m. (UK time) by ICE Benchmark Administration, or by such other entity as may in the future replace ICE Benchmark Administration as the recognised administrator of LIBOR benchmarks.    LIBOR is set at the beginning of each relevant Calculation Period for payment at the end of that Calculation Period.

Management Services Agreement

The Management Services Agreement dated 4 January 2019 as amended or supplemented from time to time, between the Issuer and the Calculation Agent pursuant to which the latter is appointed and includes any other agreements related to it, as amended or supplemented from time to time.

Maturity Date

The expiry date of the Cap Investment or the final Payment Date of the Cap‐It Certificate.

Modified Following Business Day Convention

A business day convention whereby payment days that fall on a day that is not a Business Day, should fall the first following day that is a Business Day unless that day falls in the next calendar month, in which case that date will be the first preceding day that is a Business Day.

Notional Amount

The face amount protected by a Cap Investment and the associated Cap‐It Certificate.

Notional Amount

The amount of principal underlying the derivative contract, to which interest rates are applied in order to calculate periodic payment obligations.

Payment Amount

The amount payable, if any, under a Cap‐It Certificate to a Certificate Holder on a given Payment Date, as determined by the Calculation Agent.    The Payment Amount will be zero unless the Reference Interest Rate of the Cap‐It Certificate in the relevant Calculation Period is set higher than its Cap Rate, in which case the Payment Amount shall be a positive amount payable in pounds sterling to the Certificate Holder and calculated according to the Payment Basis.

Payment Basis

The Payment Amount payable in respect of the Notional Amount
under the Cap‐It Certificate. If the level of the Reference Interest Rate for the Calculation Period, expressed as an annual percentage, is not greater than the Cap Rate, expressed as an annual percentage, then the Payment Amount payable will be zero. However, if the level of the Reference Interest Rate for the Calculation Period, expressed as an annual percentage, is higher than the Cap Rate, expressed as an annual percentage, then the Payment Amount payable will be the sum of the level of the Reference Interest Rate for the Calculation Period less the Cap Rate then multiplied by (i) the Notional Amount, and (ii) the sum of the number of calendar days in the Calculation Period divided by 365. When expressed as a mathematical formula, the Payment Basis is calculated as follows:
Terms:
P = Payment Amount payable
N = Notional Amount
R = the level of the Reference Interest Rate for the Calculation Period, expressed as an annual
percentage
C = the Cap Rate, expressed as an annual percentage
d = the number of calendar days in the Calculation Period
Payment Basis:
If R<=C, then P=0
If R >C, then P=(R‐C) x N x d/365

Payment Date

The date on which a Payment Amount, if any, is payable by the Issuer to the Certificate Holder and which shall fall five (5) Business Days after the respective Reference Date, as specified in the relevant Confirmed Certificate Terms.

Premium

The sum of money paid by the buyer, to the seller, for acquiring the rights inherent in an option. It is the sum of the intrinsic value and the time value of the option.

Proceeds

Any sum which is received by the Issuer from an Underlying Counterparty in respect of a Cap Investment.

Redemption Payment Date

Such date that falls as soon as reasonably practicable on or following the Early Redemption Date, as notified to the Certificate Holder pursuant to Condition 20 (Notices) and on which the Early Redemption Amount is payable to the Certificate Holder.

Reference Date

For each Cap Investment and Cap‐It Certificate any date falling after the Start Date and up to and including the Maturity Date on which Proceeds are payable to the Issuer by an Underlying Counterparty in respect of a Cap Investment, subject to adjustment in accordance with the Modified Following Business Day Convention.

Reference Interest Rate

The market interest rate against which the Cap Investment and its associated Cap‐It Certificate are referenced.  The Reference Interest Rate of the Cap Investments purchased by the Issuer and of the Cap‐It Certificates issued by the Issuer will normally be one of either LIBOR or Base Rate.

Start Date

The start date of the Cap Investment or Cap‐It Certificate, and the first day of the initial Calculation Period.

Subscriber

A Person wishing to purchase a Cap‐It Certificate in order to become a Certificate Holder.

Successor

Terms and Conditions

The Conditions in respect of the Cap‐It Certificates, substantially in the form set out in Schedule 1 to the Deed Poll.

Trade Date

The date on which the terms of a derivative transaction are agreed.

Transaction Register

The register of Cap‐It Certificates and their respective Certificate Holders maintained by the Administrator in accordance with the provisions of the Administration Agreement.

Underlying Counterparty

A member of the panel of one or more high grade international banks from which the Issuer will purchase Cap Investments.

Volatility

The variability of movements in a security or underlying instrument’s price. It is a measure of the amount by which an asset’s price is expected to fluctuate over a given period of time. It is normally measured by the annual standard deviation of daily price changes.

Weighted Average of the Base Rate

The Weighted Average of the Base Rate for each relevant Calculation Period, calculated at the end of each Calculation Period according on the basis set out in the Conditions.

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