Mitigating risk and avoiding dead deal costs
When a private equity investor agrees to purchase a company in a foreign currency rather than the currency in which the debt or equity is funded (e.g. investing equity from a US Dollar denominated fund in a JPY asset or raising debt in USD for a CAD investment), the fund runs the risk that, prior to closing, foreign exchange (FX) rate movements will require additional funding.
Many investors prefer to lock in the specific equity check required at the time of signing to avoid any surprises at closing. Deal contingent FX hedging allows investors to lock in a specific FX rate. It also allows them to walk away with no strings if the underlying deal does not close.
Similarly, the high amount of leverage in these deals also prompts investors to take advantage of favorable rate environments and lock in interest rate protection, prior to closing. Deal contingent interest rate hedging lets investors enter into caps or swaps before closing and eliminates breakage if the deal does not close.
Benefits of Chatham Deal Contingent Hedging Services
- Transparent pricing in an opaque market: Given the high volume of deal-contingent structures we manage, Chatham is always up-to-date on current pricing. This helps ensure that our clients do not pay a premium for a deal contingency.
- Speed to execution: Oftentimes, hedging is not a focus until the deal has been signed and investors are exposed to market movements. Through our detailed knowledge of deal contingent documentation, regulatory requirements, and pricing structures, we can execute this type of structure very quickly while minimizing the amount of time required by your team.
- Expertise with market moving transactions: We frequently assist with very large transactions that represent a meaningful percentage of the daily volume for a particular market. With this experience, we’ve developed strategies that minimize execution and liquidity costs.