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Convertible Select Loans Offer Versatility in Current Market Conditions

With relatively low interest rates and increased volatility driving the current markets – not to mention wider margins on MBS and other securities – one FHLBank Pittsburgh loan product offers the versatility you may be looking for: Convertible Select.

One type of Convertible Select loan is a fixed-rate loan that may, at the option of FHLBank, be converted to an adjustable-rate loan. The borrower receives a lower initial interest rate in exchange for selling FHLBank the option to convert the loan to an adjustable rate. If the loan is converted, it may be repaid to the FHLBank without a prepayment fee only on certain predetermined dates.

Terms and Conditions

The following terms and conditions show why Convertible Select stands out as the “multi-tool” in your FHLBank loan toolkit:

With a Convertible Select loan, you select a maturity of one year to 15 years.

The initial lockout period is the initial period of time during which the FHLBank cannot convert your loan. It can be any term less than the final maturity of the loan. For maturities greater than ten years, however, the minimum initial lockout period is five years. The first time FHLBank can convert your Convertible Select loan to an adjustable-rate loan is after the initial lockout period.

The conversion option frequency is how often FHLBank can exercise its option to convert your loan after the initial lockout period – monthly, quarterly, semiannually, biannually or even just one time. If FHLBank elects to convert your Convertible Select loan, notification of conversion will be sent to you ten calendar days prior to the conversion date. You will have the option to accept the adjustable-rate loan or to repay the loan with no prepayment fee on the conversion date, or on any predetermined reset date thereafter. However, you must provide FHLBank with five calendar days’ prior notice of your intention to repay the converted loan.

Prepayment fees may apply if your Convertible Select loan is prepaid while it is still at a fixed rate. The minimum dollar requirement for a Convertible Select loan is $5 million unless otherwise specified. Loan requests for less than $5 million may be combined with other orders to reach the minimum dollar requirement.

Calculated on an actual/360-day count basis, interest is paid quarterly based on the settlement date of the loan, unless otherwise specified. Principal and any unpaid, accrued interest are due at maturity.

Example:  10-year/1-year Quarterly Convertible Select Loan

In this example, a 10-year loan has a guaranteed fixed loan rate for one year. At the end of one year, and quarterly thereafter, FHLBank has the right, but not the obligation, to convert the fixed-rate loan into an adjustable-rate loan at a loan rate equal to 3-month LIBOR plus a spread (determined on the transaction date). If FHLBank chooses to convert this loan after the initial lockout period of one year, the loan may be repaid to FHLBank on the conversion date or on any quarterly reset date thereafter with no prepayment fee.

Other Variations

A Convertible Select with Strike Rate loan is a variation of the Convertible Select loan. All the terms described above are applicable with one important difference. With a Convertible Select with Strike Rate, the loan will be converted to an adjustable-rate loan if, and only if, the predetermined index equals or exceeds its predetermined strike rate 15 calendar days prior to a conversion date. If converted, the loan may be repaid to FHLBank on the conversion date or on any predetermined reset date thereafter, with no prepayment fee. The strike rate may be compared to indices such as 3-month LIBOR, 1-month LIBOR and Treasury rates.

A Convertible Select with Variable Strike Rate loan is a variation of the Convertible Select with Strike Rate loan. With a Convertible Select with Variable Strike Rate loan, you can elect to have the Strike Rate change during the life of the loan. All the terms describing the Convertible Select with Strike Rate loan above are also applicable to the Convertible Select with Variable Strike Rate loan. However, with the Convertible Select with Variable Strike Rate loan, you will be able to predetermine the following additional loan terms prior to the loan being made and the execution of the loan documents:

1.  When the strike rate will change;
2.  If the strike rate will increase or decrease; and
3.  How much the strike rate will increase or decrease.

This loan product was designed to provide you with as much flexibility as possible.  With this product, there are no limits as to how often or by how much the strike rate can change.

To take advantage of the versatility a Convertible Select loan can offer you, contact your FHLBank relationship manager or call the Money Desk at 1-800-288-3400.

DISCLAIMER

FHLBank Pittsburgh has taken reasonable steps to compile the data presented above, or has obtained such data from generally available public sources. FHLBank makes no representations or warranties, express or implied, as to the accuracy, completeness and timeliness of any assumptions or any other data presented herein.

The information presented herein is not investment or business advice, nor is it an offer to extend credit or buy any security or financial product; it is provided for informational purposes only. The customer must not rely on any of this information when making any investment, business or credit decision.

FHLBank products are governed by various agreements between FHLBank and its customers, as well as certain FHLBank policies and applicable regulations. In the event of any inconsistencies between information contained herein and such agreements, policies and regulations, the agreements, policies and regulations will be determinative.