Corporate Case Study: Interest Rate Risk

Our Client:
A healthcare firm with over $10 billion in annual sales and a complex debt capital structure.

Situation:
The company was reviewing its interest rate risk profile in the face of near-term hedge maturities, a changing debt capital structure and a steep but ever-shifting yield curve.  The company was receiving advice from multiple sources, including bankers and board members, each espousing different views around inflation expectations, rate movements and the impacts on the firm’s operations.  Often, the advice was conflicting with one another.

Summary:
Chatham Financial assisted the company in thinking about its key objectives, which included economic, legal and accounting issues.  The company was aiming to change both its near-term and medium-term fixed-floating rate debt profile, using various alternatives including receive fixed swaps and swaptions.  While these alternatives could not achieve the accounting results desired by management, we crafted a series “accounting friendly” hedging alternatives to address various economic risks and assisted in the legal documentation review for the transactions.  We educated and advised the treasury and reporting staff on the various alternatives to assist them in making a board presentation for hedging program approval.

Outcome:
The board approved half of the 2-part hedging program, while tabling the other half due to economic and accounting concerns articulated by Chatham.  Chatham led the execution of over $1 billion in interest rate swaps across 10 relationship banks, saving our client over 30x our fees in the process.