Financial Institutions Case Study: Asset Liability Management Our Client: A regional bank with a newly issued brokered CD portfolio. Situation: Our client was asset-sensitive and had just issued 5yr brokered CDs that paid a fixed rate of interest. The client lends to borrowers at a floating rate of interest plus a credit spread, with a nominal floor. The net interest margin (NIM) would benefit from rising rates in the future, but in the short-term NIM was compressed by the long-term funding rate relative to the floored variable rate loan portfolio. Summary: Chatham Financial assisted the client with alternative hedging scenarios to reduce the impact of its relatively high, fixed-rate long-term funding. The client was considering a receive-fixed swap vs. a floating rate with sold floor based on the Prime rate, with the intention to designate the combined swap/floor against its…

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Real Estate Case Study: Debt Ratio Our Client: A public real estate company specializing in asset management in the hospitality sector. Situation: Our client had paid down a significant portion of their floating rate line of credit, leaving them with a fixed/floating rate debt ratio higher than they desired. With hotel assets essentially re-pricing daily, the client wanted to increase their floating rate exposure on the liabilities side to better match the characteristics of their assets. Summary: We discussed entering into a receive-fixed swap to rebalance their fixed-floating mix. A secondary benefit of this strategy was that it allowed them to reduce their current interest expense due to the steepness of the yield curve; the receive fixed swap synthetically transformed a higher fixed rate obligation into a lower floating rate obligation, based on an historically low current LIBOR setting. Because…

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Private Equity Case Study: Emerging Markets Our Client: A large private equity firm contemplating an emerging markets acquisition. Situation: A private equity fund was in a competitive bid situation to acquire a retail store chain in Eastern Europe. While the deal appeared attractive in local currency, it was uncertain when translated in USD. In addition, hedging seemed unattractive because forward exchange rates reflected the deep depreciation of the local currency. Summary: The investment team’s objective was to determine the most cost-effective hedging strategy, the likely key drivers of the local currency and the maximum exposure to their returns should their equity be unhedged. Chatham Financial was able to assist in exploring various hedging strategies including forwards, options and inflation-linked instruments. Also, we assisted in researching various macroeconomic data for the country to develop correlations against the investor’s base currency, modeling…

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Corporate Case Study: Tracking & Reporting for Hedges Our Client: A global musical instruments manufacturer and distributor who actively manages FX and interest rate risk exposures. Situation: The company was managing over 1,500 derivative instruments in Excel and was applying hedge accounting for more than half of their derivatives portfolio. They were applying a hedge accounting methodology that caused some earnings volatility and wanted to evaluate whether another approach, such as regression for effectiveness assessment and hypothetical derivative method for measurement, could produce better results. The period end process was taking longer than our client wanted, and, unfortunately, it was necessary to enter and maintain every derivative into multiple systems or spreadsheets. The company was seeking to implement a hedging, hedge accounting & derivative reporting solution that would: Ease the administrative burden of tracking and reporting derivative transactions Eliminate risk…

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Derivatives Regulation Case Study: Clearing Selection Our Client: A regional bank that uses derivatives for asset-liability management and offers hedges to its customers in connection with variable-rate loans. Situation: The client, who will be required to centrally clear certain derivatives transactions, hired Chatham to evaluate and help in the selection of futures commission merchants (FCMs), with whom the client will need to establish a relationship in order to be able to access clearing houses for the central clearing of derivatives trades. Outcome: Chatham conducted an independent RFP (request-for-proposal) process for the client involving eight FCMs. The RFP assessed fee schedules, creditworthiness, initial margin estimates and complementary services available to customers. The client received a full analysis and evaluation of the FCM proposals customized to align with the client’s specific needs. The RFP evaluation was presented to the client’s senior management…

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Private Equity Case Study: Currency Challenges Our Client: A large private equity firm executing an acquisition in a developed economy. Situation: A private equity consortium had agreed to acquire a North American company. Due to the state of debt capital markets, a substantial portion of the debt capital structure was denominated in USD with floating rates. Summary: The consortium and company needed to determine the best way to address the currency mismatch between cash flow and interest expense, as well as the optimal way to create a higher percentage of fixed rate debt. Chatham Financial educated the team on the use of cross-currency swaps, created transparency in the execution process of the hedging transactions, and assisted in the negotiation of the key documentation for the derivatives to ensure no hedge counterparty stood ahead of other secured lenders to the business.…

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Corporate Case Study: Interest Expense & Currency Risk Our Client: A software firm with contracts in multiple currencies, a complicated legal structure and unique debt structures. Situation: The company had recently increased leverage from a negligible amount to roughly 50% of its enterprise value in a recapitalization, compounding the currency risk. The company was trying to determine the best way to hedge its exposure to a CAD loan with interest payments based on a USD LIBOR index, as well as how to manage its currency risk across multiple currencies. Summary: Chatham Financial assisted the company in developing a hedging strategy for its debt by explaining the various hedging structures that could be used to create the appropriate hedge of the firm’s interest rate risk. To help the management team obtain an understanding of its currency risk, we worked to isolate…

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Real Estate Case Study: Mezzanine Debt Our Client: A nationwide owner of hotels. Situation: Our client’s hotel portfolio was leveraged with a number of long-term low fixed interest rate loans. Since the origination of the original first mortgage debt, increases in operational efficiency for the portfolio resulted in improved portfolio cash flow. Our client’s desire was to use the increased cash flow as a borrowing base to create additional liquidity for new capital investments in the portfolio. The prepayment penalties associated with refinancing the first mortgages along with the faltering CMBS market made a conventional refinancing cost prohibitive, and market turmoil made traditional, low-leverage, mezzanine debt unavailable. The client engaged Chatham to find a capital partner. Summary: As is typical with our engagements, Chatham’s role started with the strategic planning of the transaction and continued until the deal closed. We…

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Corporate Case Study: Strategy & Accounting Our Client: A global packaging and manufacturing company with over $7 billion in revenues and a complex capital structure. Situation: The company had recently issued fixed rate financing and was considering converting it to variable via a pay-variable, receive-fixed interest rate swap. Management’s objective was to achieve a certain fixed-floating mix, but was sensitive to the earnings impact that could be generated from the changes in fair value of a pay variable interest rate swap. Summary: The company sought our advice regarding the potential application of fair value hedge accounting on the proposed structure. Our analysis not only highlighted crucial issues that hindered the application of the shortcut method (such as the presence of equity-linked options in the hedged bond), but also showed the earnings impact over the life of the hedging strategy, under…

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Financial Institutions Case Study: Loan-level Hedging Our Client: A regional bank with an established hedging program. Situation: The bank was looking to expand its loan-level program under the supervision of a former derivatives marketer and had faced challenges on the accounting for its balance sheet derivatives. The bank called Chatham on the advice of its employee, who had prior interactions with Chatham in his former role as a counterparty to other Chatham clients. Summary: Chatham Financial assisted the bank by loading all of its existing trades into our proprietary system, including the balance sheet derivatives that needed accounting re-designations. Chatham reviewed the confirmations on all of the trades, along with the ISDA agreements with existing counterparties, to ensure appropriate terms and counterparty diversification. Chatham hosted management at Chatham’s campus to educate top officials on our turn-key approach to loan-level hedging,…

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