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Case Study

Interest rate hedging for M25 road refinancing

Summary

Chatham advised Connect Plus on the refinancing of the M25 motorway, the largest infrastructure refinance in the UK since 2015.

Background

  • The M25 motorway encircles most of Greater London. Its £889M refinance successfully raised the required debt in the public bond market.
  • As part of the refinance, additional debt was drawn to accommodate new works and project costs going forward.
  • The project’s existing funding structure consisted of a syndicate of commercial bank debt and included pay fixed interest rate swaps and receive fixed RPI (retail price index).
  • Existing interest rate swaps were terminated and RPI swaps were restructured to match the new notional and economic terms.

Our approach

  • Chatham advised Connect Plus on the value attributed to terminating the existing interest rate swaps before maturity, by looking at x-value adjustment (XVA) reserves held against the derivative positions.
  • Chatham participated in the evaluation of bids from potential hedge coordinating banks and presented the sponsors with the best value proposition and commentary on each bank's deliverability of such a large coordination mandate.
  • Chatham benchmarked the pricing for the coordination role as well as the associated novation fee. Swing tables allowed us to pre-agree spreads that would provide complete transparency in the process leading up to and on financial close.
  • Chatham also benchmarked the restructure of the RPI swap, providing transparency around how the large out-of-the-money position should be dealt with.

Benefits

  • The refinancing of the project was successful and achieved the objectives required by the sponsors.
  • Financial close was smooth with several dry runs held in the run up.
  • The sponsors were able to refinance the project despite having a significant negative mark to market.
  • The fixed bond priced better than expected, which resulted in a significant pick up in debt servicing costs compared to the original 2009 private finance initiative (PFI).

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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.