UK REIT: Pre-hedging loan breakage costs
SummaryA case study of how Chatham advised a UK REIT how to optimise its hedging strategy, when substituting an existing loan.
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.
- 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.
- 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.
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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.
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Financial risk management serving commercial real estate since 1991
Chatham Financial is the largest independent financial risk management advisory and technology firm. A leader in debt and derivative solutions, we provide access to in-depth knowledge, innovative tools, and an incomparable team to help mitigate risks associated with interest rate and FX exposures.
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