Infrastructure Case Study: Hedging for Long Term Debt

Our Client:
A power company with generation and distribution businesses globally.

Situation:
The company, in later stages of finalizing the terms of its financing, was reviewing its interest rate risk profile in light of hedging requirements and business constraints given the long-term nature of the debt and investment hold period. The company was receiving advice from the multiple banks involved in the financing, each espousing different views on rate movements and the impacts on the firm’s operations. In addition, the company and hedging banks did not have the same understanding of certain financing terms relating to hedging.

Summary:
Chatham Financial assisted the company in developing a hedging strategy for its long-term debt by explaining the various hedging structures that could be used for the different phases of the project’s life cycle to create the appropriate hedge for the firm’s interest rate risk. Working alongside the management team, we also ran sensitivity and breakage analysis to help quantify this risk. Additionally, we assisted in legal documentation review and negotiated a more commercially reasonable interpretation of certain ambiguous hedging provisions.

Outcome:
The company obtained a better understanding of its interest rate risk and approved a suitable hedging strategy. Across several relationship banks, Chatham led the efficient execution of long-dated interest rate swaps and caps corresponding to the different phases of the project.