Defeasance Frequently Asked Questions When deciding to prepay your fixed rate CMBS debt, whether through yield maintenance or defeasance, most borrowers have questions. Here are a few of the more common ones, but if you have others, or just want to talk to a defeasance expert, don’t hesitate to contact us. 610.925.3120 Download Defeasance FAQs

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What a Borrower Should Know Before Defeasing Defeasance is the process through which a borrower is released from the obligations of its debt. The borrower purchases a portfolio of government bonds to serve as replacement collateral for the debt and to generate the cash flows required to meet the future obligations of the debt. While the process can be summarized in a few lines, in practice it is very complex, involving a large number of parties with competing interests. Having an independent, experienced advisor on the borrower’s side is important to ensuring an on-time, cost-effective, and complication-free close. Download This Bulletin

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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: 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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Private Equity Case Study: Add-on Acquisition Our Client: A large private equity firm completing an add-on acquisition for one of its portfolio companies. Situation: A portfolio company acquired a public firm via a refinancing of its existing debt, contingent on a shareholder vote scheduled to take place several months in the future. The target company had existing swaps in a liability position facing a member of the new lending group, and the acquirer found the then-current interest rate environment attractive and wanted to protect against rising rates. Summary: The acquirer and private equity sponsor wanted to understand its hedging alternatives, and ensure that any hedging that was executed left the company in position to take advantage of an IPO in the coming years by ensuring low earnings volatility as a result of any hedges. Chatham Financial explored various hedging alternatives,…

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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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It wasn’t the best of times, it quickly became the worst of times. This classic Dickens’ line sets the scene, mutatis mutandis, for a modern tale of two cities that turned to derivatives in time of need. As the old century rolls into the new, political inertia pushes both Athens and Detroit to source more debt and hedge, for better or for worse, with sophisticated derivatives. But when the market turns against them, they find their fate far worse than when they began. Act one of this story opens in Athens in 2001. The Greek government is caught between a rock and a hard place. On the one hand, they have US Dollar and Japanese Yen debt worth around $10 bn euros. On the other hand, Greece has just entered the Eurozone and is required by the Maastricht Treaty to…

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Real Estate Case Study: Defeasance Our Client: A public real estate company that owns and manages over 600 retail operating and development properties worldwide. Situation: Our client engaged Chatham to assist as they used proceeds from a new securitized loan to partially defease existing secured debt. The securitization was designed to include a triple-A rated tranche which qualified as “eligible collateral” under the Term Asset-Backed Securities Loan Facility, or TALF, provided by the Federal Reserve. The defeasance was predicated on the funding of the new loan which in turn, was predicated on the securitization being deemed eligible for TALF funds by the Federal Reserve, a deadline that could happen in as few as five business days. (To add to the complexity, the defeasance required review from three rating agencies.) Finally, the original loan contained language that was unclear with respect…

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