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How have Total Return Swap Hedges of Deferred Comp Liabilities Performed in High-Rate Environments?

From May to September of 2022, SOFR increased by approximately 200 basis points. Companies are evaluating the impact to Total Return Swap (TRS) hedges of Nonqualified Deferred Compensation Plan (DCP) liabilities.

The chart below shows the Equity Leg and Financing Leg of the TRS since the inception of LIBOR in 1986. We assume the Equity Leg provides the returns of a 60/40 equity/fixed income portfolio, while the Financing Leg is equal to SOFR + 50 basis points for 2022, with LIBOR used for all other years.

The TRS Financing Leg peaked from 1986-1990, averaging 8.46%. Over this period, the TRS Equity Leg returned an average of 12.58%. In 1989, the Financing Leg reached its highest level of any individual year, at 9.87%. That same year, the Equity Leg returned 24.75%.

From 1996-2000, the Financing Leg averaged 6.29%, while the Equity Leg returned an average 14.12%. The average return of the Equity Leg over the entire period (1986 to present) was 9.53%, while the average Financing Leg was 3.97%. Since the inception of LIBOR, the TRS has provided substantial economic benefits to Plan Sponsors in high-rate environments.

Atlas Financial Partners is the leading administrator for TRS hedges of DCP liabilities, currently administering $6+ billion for various financial institutions and corporations. We would be happy to discuss further and put you in touch with experts who could advise you on the legal, tax, and accounting benefits to this strategy, as well as with banks which are executing this strategy for corporations.

Atlas Financial Partners and its associates do not give legal, accounting, tax, or investment advice. Please consult with your own advisers. Atlas is not a third-party control person under CFTC Regulation 23.402(c); a designated evaluation agent under CFTC Regulation 23.434(b) nor a qualified independent representative under CFTC Regulation 23.450(b). Atlas is a third-party administrator performing purely administrative functions with respect to the management of the transactions discussed herein. Atlas is not a swap advisor or a swap dealer and will not provide recommendations or advice on swap strategies.


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