Our client was planning a major refinancing of a portfolio of student housing assets in Europe. Having grown impressively in recent years, utilising asset level debt to partially fund that expansion, a consolidation of those loans was being planned, improving overall borrowing costs by raising one €240m investment debt facility.
Given the scale of the re-financing and the likely time taken to complete that process, the client faced a risk of rising interest rates ahead of completion of the loan and so was keen to explore pre-hedging strategies six months in advance of the anticipated completion of the re-financing.
In addition to this initial interest risk, the client was keen to ensure that any long term hedging of the loan was priced reasonably and provided appropriate interest rate protection for the loan.
Several pre-hedging alternatives were considered, ultimately settling on a payer swaption to protect the client from the risk of a severe rise in swap rates.
A competitive selection process for counterparties allowed the client to implement the pre-hedge at very attractive terms.
Our review of the hedging terms in the Facility Docs ensured that they gave the borrower maximum flexibility with regard to strategy, hedging excess reduction and counterparty selection.
At an early stage, we challenged the zero interest rate floor in the EURIBOR definition – at the time worth 24 bps p.a. over the life of the facility. We worked closely with the borrower and debt advisor to remove the floor from the loan. JCRA managed a competitive process to allocate the hedging, leading to a 3.5 bps reduction in the overall spread.
The swaption expired, allowing the client to re-hedge at an attractive all-in lower rate. We generated €2 million of net savings for the client over the life of the loan.