The Black Swan of Leicester Last summer, London bookmakers were updating their odds list for the most outlandish possibilities. Cantankerous TV personality Simon Cowell to become Prime Minister: 500/1. The Loch Ness monster to be discovered: 500/1. Her Majesty the Queen to release a chart-topping hit that Christmas: 1000/1. Kim Kardashian to become US president: 2000/1. Elvis to be found alive and well: 2000/1. But then the bookies took a more preposterous step; they offered 5000/1 odds that humble soccer team Leicester City, having barely escaped being relegated (i.e. unceremoniously dumped to the lower leagues) the season before, would win the English Premier League. Now the English top-flight soccer league constitutes a pure plutocracy – the wealthiest clubs buy all the best players, and with neither annual draft nor salary cap to restore some semblance of parity, the top five…

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A Hedge! A Hedge! My Kingdom for a Hedge! Four centuries ago, the most influential English-language playwright in history was laid to rest in Stratford-upon-Avon. Yet since April 25th, 1616, William Shakespeare has captivated four centuries of audiences and readers with his masterful dramatic arcs, playful neologism, and comprehensive depiction of life’s full breadth. In fact, Shakespeare’s astonishing thematic scope led Ralph Waldo Emerson to declare: “What point of morals, of manners, of economy, of philosophy, of religion, of taste, of the conduct of life, has he not settled? What mystery has he not signified his knowledge of?” As we reflected on Emerson’s adulation, it dawned on us that if Shakespeare really did settle all points of the economy, he must have written plenty about risk management. We spent the weekend curled up with our college Shakespeare text and, as…

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Volcker Rule: balance sheet hedging and loan-level interest rate hedging Chatham Financial White Papers – July 2015 Chatham believes that under the Volcker Rule, balance sheet hedging and loan-level interest rate hedging, generally do not constitute proprietary trading and therefore are exempt from the requirement for specific compliance programs. We have documented our conclusion in these white papers: With the implementation of the Volcker Rule, the question arises as to the impact of the rule on balance sheet risk management (“BSRM”) hedging programs. The Volcker Rule’s proprietary trading ban is a prohibition on certain short-term speculative trading. As explained in this white paper, trades executed in BSRM hedging programs are not executed for purposes prohibited by the Volcker Rule. As a result, BSRM hedging transactions are typically not “proprietary trading” nor should the BSRM programs themselves be required to implement…

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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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The thrill of taking risks can be exhilarating. The excitement comes from wagering a substantial potential loss to acquire a meaningful possible gain. This interplay is what draws us to extreme sports or to the middle of the desert to siphon money into slot machines. But when the wellbeing of your business is on the line, that’s not a thrill most people crave. Imagine how Warren Buffet must have felt going naked on his recent one billion dollar bet on the NCAA March Madness playoffs’ brackets. Buffet teamed up with Quicken Loans to sponsor the Billion Dollar Bracket Challenge, where a one billion dollar winning goes to anyone submitting a bracket correctly picking every winner and loser in the March Madness college basketball tournament. Alright, so in reality the bet was not that exciting at all. The odds were in…

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The firm begins developing in-house technology establishing a new core competency.

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Inflation Risk Management Pricing future inflation cash flows is an imprecise science, but the consequences of error and inaccuracy are often significant. Chatham’s unique approach of seamlessly integrated technology and advisory services bridges the gap often left by off-the-shelf pricing solutions. Simplifying complexity: Our advisors have experience translating the underlying economics and documentation of inflation-linked cash flows into trade-worthy structures. We have also been involved in some of the largest inflation hedges ever traded. We explain risk in meaningful terms and help stakeholders make informed business decisions about both underlying assets and any hedging structures. Extensive experience and diverse capabilities: We advise and execute on inflation-linked debt and derivatives for both buy- and sell-side clients, including: Portfolio analysis and due diligence Risk management strategy & policy Hedge structuring Bank selection and negotiation Documentation Market liquidity management Execution Valuation Hedge accounting…

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As sequels go, very few movies have been hyped as much as this one. Catching Fire, the latest installment in the Hunger Games franchise, opened this past weekend to throngs of teens, tweens, and giddy parents, scoring $161.1mm in box office receipts for the 4th best domestic movie opening in history, as well as the best November opening weekend ever. Fans couldn’t wait to get a second helping of Peeta Mellark and Katniss Everdeen, giving director Francis Lawrence a bona fide blockbuster going into the Thanksgiving holiday weekend. The latest offering picks up with the stars’ triumphant return to District 12 on their victory tour, having survived a vicious fight-to-the-death tournament, only to realize that they will have to do it all over again. While sequels can sometimes leave a bad taste in your mouth, fans have judged their second…

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A strong hedge accounting program can reduce or eliminate earnings volatility Investors who wish to avoid surprise risks or auditor scrutiny can depend on Chatham’s expertise in hedge accounting. Whether you have SEC filing obligations, need to provide transparency to investors, or wish to establish a consistent earnings track record, we can successfully navigate the complexities of ASC 815 or IAS 39, which are so critical. By timing the earnings recognition of the derivative with that of the hedged asset, liability, or forecasted transaction, we can significantly reduce or eliminate the earnings volatility that would otherwise be recognized in financial statements. Hedge Accounting solutions for private equity sponsors and their portfolio companies Chatham’s comprehensive hedge accounting solutions are customized for each client to reduce complexity and administrative burdens. We provide technical consulting, analysis, technology, education, and key hedge-accounting deliverables on…

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Optimal management of large and complex debt and derivative portfolios As infrastructure portfolios grow, so do the challenges of managing them. In recent years, such challenges are compounded by more diversified debt terms and increased regulatory requirements, including trade reporting and portfolio reconciliation. In addition, derivatives have a heightened reputation for risk. The resulting increased investor and regulatory scrutiny require even more robust transaction recording, valuation, and monitoring. How Chatham supports your risk management needs Chatham’s advisory services combined with accounting-compliant debt and derivative valuations technology are specifically built around equity sponsor requirements. This approach is unique from the majority of advisory-only firms and pure technology providers. And, it forms the basis of a range of services, which may be tailored to these requirements: Central repository of debt and derivative economics and documentation Derivatives valuations, including accounting-compliant CVAs Derivatives accounting…

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