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Case Study

Hedging a EUR refinancing


A recent example of an optimal hedging strategy for a large European private equity fund looking to refinance one of its assets.


  • Refinancing of an existing unitranche (provided by a debt fund) with an optimized senior (four lending banks) and second lien (debt fund) structure
  • Existing unsuitable hedging instruments with negative marked-to-market from the previous financing
  • 0% 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 (four to five years) 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


Large savings on the termination costs of the existing hedging instruments

Post closing
Tailor made four-year interest rate hedging strategy to support the business objectives:

  • 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:
    • mitigate break costs in a refinancing scenario
    • provide a worst case hedge if EUR rates are above the strike of the swaption in two years
    • benefit from a low interest rate environment in two year's 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

Contact the author

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About the author

  • Benoit Duhil de Benaze

    Managing Director
    Hedging and Capital Markets

    Private Equity | London

    Benoit Duhil de Benaze is a member of Chatham’s European Private Equity team. He helps clients with their risk management, from FX deal-contingent hedges in multibillion, cross-border M&A to large interest rate financing/ refinancing situations.


This material has been created by Chatham Financial Europe, Ltd. and is intended for a non-U.S. audience. Chatham Financial Europe, Ltd. is authorised and regulated by the Financial Conduct Authority of the United Kingdom with reference number 197251.