Hedging interest rate risk
Wynn Resorts (WYNN) has entered into floating-for-fixed interest rate swap arrangements in order to manage interest rate risks related to certain of its debt facilities. The interest rate swap enabled Wynn Resorts to convert a portion of its floating-rate debt to a fixed rate. This will protect the company from rising interest rates to service its floating rate debt. Casino companies like MGM Resorts (MGM) and Las Vegas Sands (LVS) have floating rate debts in their balance sheets, and hence, they are exposed to rising interest rates. Exchange-traded funds (or ETFs) like Consumer Discretionary Select Sector Standard and Poors depositary receipt (or SPDR) (XLY) and VanEck Vectors Gaming (BJK) track these companies.
The above chart shows how Wynn Resorts’ floating-for-fixed interest rate swap might take place. After entering into the swap agreement with the swap counterparty, Wynn Resorts pays a fixed interest rate on its floating rate debt because it expects that the interest rate will rise in the near future. However, the swap counterparty anticipates a fall in interest rates and could thereby gain if the floating interest rate falls below the fixed interest rate. The floating rate received by Wynn Resorts from the swap counterpart is paid to the company’s senior term loan lender. As of September 30, 2014, and December 31, 2013, the interest rate swaps were recorded as an asset of $8.9 million and $10.3 million, respectively.
Wynn Resorts (WYNN) has three interest rate swap agreements intended to hedge a portion of the underlying interest rate risk on borrowings under the Wynn Macau senior term loan.
Under the swap agreements, Wynn Resorts pays a fixed interest rate on notional amounts corresponding to borrowings incurred under the Wynn Macau senior term loan. This is in exchange for receipts on the same amount at a variable interest rate based on the applicable Hong Kong interbank offered rates (or HIBOR) and the London interbank offered rates (or LIBOR) at the time of payment. These interest rate swap agreements mature in July 2017.