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Private Equity Fund Asset Sale Hedging – Dual-track process
Case studies

Private Equity Fund Asset Sale Hedging – Dual-track process

Background
  • A EUR denominated fund was selling an asset denominated in USD with split signing and completion giving rise to EURUSD risk, which the sponsor wanted to hedge
  • The M&A was subject to various anti-trust approvals and the exact date of closing wasn’t known in advance
  • The private equity sponsor was very confident in the M&A completing; as a result the potential impact of a hedge liability if the deal didn’t complete was a minor concern
  • One challenge was that the designated trade entity had to be the “HoldCo”, an orphan SPV with no income or liquid assets and no FX dealing lines
Our Approach
  • JCRA outlined potential hedging alternatives to the PE sponsor, including both vanilla and deal-contingent (“DC”) alternatives
  • As the risk of the M&A not completing was perceived to be very low, the case for a DC hedge was less compelling
  • However, due to a potentially easier implementation process (no credit lines required) and a flexible settlement mechanism, a DC forward at competitive pricing was still a viable alternative
  • As a result, JCRA ran a dual-track process for both vanilla and DC hedging with relationship and international investment banks
  • Pricing for DC forward turned out to be very attractive reflecting the high probability of the M&A closing
  • Since a vanilla hedge required a guarantee from the fund, which would have prolonged the process, the sponsor decided to hedge the EURUSD risk by way of a DC forward
Benefits
  • Efficient dual-track process with six banks allowed for thorough price discovery and making an informed decision on the preferred strategy
  • Extremely attractive DC pricing below 15 pips, reflecting a cost of <16% of the at-the-money forward option premium
  • DC pricing was only c. 10 pips above vanilla pricing and two days faster to implement – a very attractive charge in light of EURUSD intraday movements of 40 pips or more
  • Flexible settlement date taking into account the uncertain closing date and no risk of having to settle a hedge liability in the event of the M&A not closing
 

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