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Case Study

UK REIT: Pre-hedging loan breakage costs

  • shane canavan headshot

    Authors

    Shane Canavan

    Director
    Hedging and Capital Markets

    Real Estate | London

Summary

A case study of how Chatham advised a UK REIT how to optimise its hedging strategy, when substituting an existing loan.

Background

A UK REIT was looking to substitute and dispose an existing fixed rate loan, which would have led to partial repayment of the loan.

  • Chatham was appointed to manage the partial termination process and ensure transparent pricing of the breakage costs.
  • The market risk of a further downward movement in interest rates had to be mitigated.
  • The pre-hedging strategy had to limit the potential increase of the loan’s breakage costs between exchange and completion.

Our approach

  • After discussing the business plan with the company, we determined the key objectives and advised on the most suitable pre-hedging strategy using interest rate swaptions.
  • We helped the company with sourcing a competitive hedge counterparty to implement the hedging strategy within the company’s deadline.
  • We advised on the methodology applied by the lender to determine the breakage costs of the fixed rate loan.
  • We conducted continuous benchmarking with the lender and hedge counterparty to ensure fairness and transparency.

Benefits

  • The client received transparent and fair loan breakage costs.
  • The market risk of moving interest rates was removed.
  • A highly effective hedging strategy in line with the company’s objectives.
  • Significant time and resources were saved, due to an efficiently run process.

Contact us

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About the author

  • Shane Canavan

    Director
    Hedging and Capital Markets

    Real Estate | London


Disclaimers

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.