Termination of an existing interest rate hedge
Hedging and Capital Markets
Private Equity | London
SummaryA recent example of how we successfully advised a European financial sponsor on terminating an existing debt hedge at exit.
- 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.
- 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.
- 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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Interest rate swaption
An interest rate swaption is an option that provides the borrower with the right but not the obligation to enter into an interest rate swap on an agreed date(s) in the future on terms protected by the swaption.