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Case Study

Termination of an existing interest rate hedge

Summary

A recent example of how we successfully advised a European financial sponsor on terminating an existing debt hedge at exit.

Background

  • A highly successful exit (more than 3x return) from a European financial sponsor to a strategic buyer.
  • The existing debt was fully repaid at company level by the new owner shortly after closing.
  • The existing debt, hedged with interest rate swaps, was provided by a pool of banks. All swaps were deep in-the-money (i.e. asset for the company).
  • Our client had the right to terminate the interest rate swaps by the banks.
  • The client received an un-competitive offer to terminate the swaps.

Our Approach

  • We provided independent pricings/valuations for the swaps.
  • We analysed termination/x-value adjustment (XVA) charges that were potentially applicable to the trades,
  • We negotiated termination costs in line with market practice.
  • We co-ordinated the termination process.

Benefits

  • Transparency on XVAs. XVAs are too often passed on to clients, who are charged without much transparency.
  • Large savings for the client on the termination costs of the existing hedging instruments (more than 7x Chatham fee).
  • Fair and independent termination process for both parties (New owner and the seller).

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