Interest Rate Hedging in 2015:

A Guide to Laying the Foundations

February 2015

For European private equity funds and their portfolio companies, this primer lays out several practical principles and best practices to interest rate hedging.


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Overview:

With the UK General Election looming amidst a backdrop of continued uncertainty on the future of the Eurozone, the European Central Bank’s new quantitative easing programme and other interest rate policy measures, the financial risks facing UK and European businesses are manifold. How best to take advantage of historically low interest rates has been a prominent concern at private equity fund managers and portfolio companies alike. Investors and company boards are increasingly asking management teams about their risk management strategy in relation to debt financing and interest rates. Access to efficient debt capital is key, but they are also concerned whether the company’s interest rate hedging strategy is appropriate for the future – the medium-term – not just the present.

Interest rate hedges include a variety of different products to help protect any leveraged business against interest rate risk. These are generally used when a company has debt with floating rate interest and it wishes, or is required to by its lenders, to manage the risk of interest rate fluctuations and thus gain certainty over future payments. These products are effective in managing risk, but have the potential to add complexity, particularly to those who lack specific experience within their fund or portfolio companies. Hedging can often be left to the end of a debt closing process, considered as something of a box-ticking exercise when in fact it should be considered early and alongside general finance structuring. In fact, we would suggest it is good practice to lay foundations early, before a potential hedge event is on the horizon.

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