Dominion Gas Holdings, Llc Anticipatory Interest Rate Hedging Harvard Case Solution & Analysis

Dominion Gas Holdings, Llc Anticipatory Interest Rate Hedging Case Study Solution

Risks Face by not Entering into Swap:

The company can face the interest rate fluctuation risk by not entering into the forward starting interest rate swaps. The risk might be in the form of an increase and decrease in interest rates such as if the current interest rates in markets are lower but are expected to rise in future when the company will be thinking to issue new debt then its overall interest rate expense will be increased as compared to the current situation of interest rate expense, ultimately, the negative impact will create in the mind of investors and potential investors of the company relating to the cash flows because the utility owners of the company wants a growth in cash flows to get the higher investment returns.

Swap Value from LIBOR Bootstrapped Discount Factor:

Fair Swap Value from OIS Discount Factor:

Consequences of not Issuing Debt and Having Forward Swap:

Due to some unexpected reasons, Dominion Gas decided not go for senior debt issuance at the early November 2013. At this stage, the consequences of having the forward starting interest rate swaps are the

• Loss of its initial brokerage fee for entering in the forward starting interest rate swaps contract from other party. The brokerage fee or cost is an amount equal to the swap brokerage cost which is incurred by the company at the time of making the contact along with the loss of swap breakage costs, which is the cost that are paid by the company at the time of termination of the contract. In order to avoid this consequence, company should find another party whose intention is to raise 1 billion United States dollars senior debt funds in November 2013 with the same terms and conditions on which the company had entered in the contract with other party.
• Moreover, the breakage of contract and the non-issuance of expected senior debt in the market might create the negative impact in the mind of existing investors and potential investors that the company has no any future plans which might lead towards the decline in potential cash flows ultimately a decline in expected investor returns which will down the market value of Dominion common shares and the earning per share growth.

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