Skip to main content
Log In
Low angle view upwards of a glass skyscraper
Case Study

Hedging a EUR refinancing

Summary

A recent example of an optimal hedging strategy for a large European private equity fund looking to refinance one of its assets.

Background

  • Refinancing of an existing unitranche (provided by a debt fund) with an optimized senior (four lending banks) and second lien (debt fund) structure
  • Existing unsuitable hedging instruments with negative marked-to-market from the previous financing
  • 0% and 0.25% floors on EURIBOR to be taken into consideration
  • Business plan included potential refinancing after two years and the desire to hedge for a longer period (four to five years) than the mandatory hedging requirement

Our approach

  • Provide support for legal documentation negotiation (hedging letter and security wording for second lien hedging)
  • Analyse different options available on the existing hedging instruments: termination, blend-and-extend, run-off or top-up
  • Work closely with the company and the sponsors to structure and implement an optimal hedging strategy while mitigating the potential impact of break costs in a refinancing scenario after two years
  • Implement a hedging strategy that provides certainty for the first two years and flexibility thereafter
  • A two-year swap followed by a two-year out-of-the money option (swaption) to enter into a two-year swap were implemented

Benefits

Pre-closing
Large savings on the termination costs of the existing hedging instruments

Post closing
Tailor made four-year interest rate hedging strategy to support the business objectives:

  • Two-year swap with floor buy-back to provide certainty on interest costs
  • Two-year out of the money (swaption) on a two-year swap to:
    • mitigate break costs in a refinancing scenario
    • provide a worst case hedge if EUR rates are above the strike of the swaption in two years
    • benefit from a low interest rate environment in two year's time
  • Deferred premium on the swaption to minimize liquidity impact
  • A competitive process including five banks was conducted to ensure an optimal pricing outcome for the client

Contact the author

Please complete the form below to find out more about optimal hedging strategies for private equity funds.

About the author

  • Benoit Duhil de Benaze

    Managing Director
    Hedging and Capital Markets

    Private Equity | London

    Benoit Duhil de Benaze is a member of Chatham’s European Private Equity team. He helps clients with their risk management, from FX deal-contingent hedges in multibillion, cross-border M&A to large interest rate financing/ refinancing situations.

Disclaimers

This material has been created by Chatham Financial Europe, Ltd. and is intended for a non-U.S. audience. Chatham Financial Europe, Ltd. is authorised and regulated by the Financial Conduct Authority of the United Kingdom with reference number 197251.