This article concerns embedded hedging - where the inflation linked hedge has been embedded into the underlying facility agreements, or where this is provided for under the facility agreement. It does not apply to standalone derivatives or hedging contracts governed by ISDA agreements.
In a previous article, published on 12 February 2018, we outlined a case study involving a Housing Association client of JCRA who was facing something of a ‘Hobson’s choice’ in dealing with legacy inflation-linked hedges.
At the time of publication, the borrower and lender in our case study had not reached an agreement on the way forward. As the deadline for the implementation of ring-fencing rapidly approaches (it becomes law on 1 January 2019), the situation is yet to be resolved to the satisfaction of either party. The bank in question has received different external legal advice to other lenders to the sector. Consequently, there is inconsistency in the approach of banks to this issue and other lenders are not requiring borrowers to take action in respect of these hedging instruments. We are now speaking with several clients across the UK who have been caught up in the same situation.
Download this report to discover the unintended consequences of the ring-fencing initiative.