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Hedging of EUR refinancing
Case studies

Hedging of EUR refinancing

Background
  • Refinancing of an existing unitranche (provided by a Debt Fund), with an optimized Senior (four lending banks) / Second Lien (Debt Fund) structure
  • Existing unsuited hedging instruments with negative marked to market from the previous financing
  • 0.00% 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 (4yr-5yr) 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 hedge strategy to support the business case:

  • 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:
  1. mitigate break costs in a refinancing scenario
  2. provide a worst case hedge if EUR rates are above the strike of the swaption in two years
  3. benefit from a low rate environment in two years 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
 

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Contact us

If you need hedging or debt advice or would like to speak to the team, please get in touch.