Interest rate hedging for M25 road refinancing
Hedging and Capital Markets
Infrastructure | London
Chatham advised Connect Plus on the refinancing of the M25 motorway, the largest infrastructure refinance in the UK since 2015.
- The M25 motorway encircles most of Greater London. Its £889M refinance successfully raised the required debt in the public bond market.
- As part of the refinance, additional debt was drawn to accommodate new works and project costs going forward.
- The project’s existing funding structure consisted of a syndicate of commercial bank debt and included pay fixed interest rate swaps and receive fixed RPI (retail price index).
- Existing interest rate swaps were terminated and RPI swaps were restructured to match the new notional and economic terms.
- Chatham advised Connect Plus on the value attributed to terminating the existing interest rate swaps before maturity, by looking at x-value adjustment (XVA) reserves held against the derivative positions.
- Chatham participated in the evaluation of bids from potential hedge coordinating banks and presented the sponsors with the best value proposition and commentary on each bank's deliverability of such a large coordination mandate.
- Chatham benchmarked the pricing for the coordination role as well as the associated novation fee. Swing tables allowed us to pre-agree spreads that would provide complete transparency in the process leading up to and on financial close.
- Chatham also benchmarked the restructure of the RPI swap, providing transparency around how the large out-of-the-money position should be dealt with.
- The refinancing of the project was successful and achieved the objectives required by the sponsors.
- Financial close was smooth with several dry runs held in the run up.
- The sponsors were able to refinance the project despite having a significant negative mark to market.
- The fixed bond priced better than expected, which resulted in a significant pick up in debt servicing costs compared to the original 2009 private finance initiative (PFI).
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