Private Equity Case Study: Interest Rate/Currency Hedging Strategy

Our Client:
A large private equity firm undertaking an LBO of a leading emerging-market based retailer.

Situation:
As part of the LBO of an emerging-market based retailer, the private equity firm undertook a multi-billion EUR bond issuance. In addition to the interest rate risk from the debt issuance, the firm deemed unacceptable the currency risk arising from the mismatch between non-local debt and emerging market cashflows. The locus of the retailer in an emerging market presented additional hurdles in terms of currency regulation and the sensitivity of the market to the relatively large size of the proposed hedges. Finally, hedge accounting was also a concern for the firm and retailer.

Summary:
Chatham Financial provided in-depth analysis of the interest rate and currency risk associated with the debt service and potential devaluation of the local emerging market currency. From this, we developed a hedging strategy appropriate to the sensitivity and size of the deal, the ability of the market to absorb the hedges efficiently, and the hedge-accounting treatment desired. Additionally, we assisted in preparation and negotiation of all legal, tax and regulatory documentation needed to complete the hedges.

Outcome:
The firm approved the hedging strategy consisting of interest rate swaps and series of currency forward contracts. Execution across multiple relationship banks was efficient. Since original execution, Chatham has assisted in the restructuring of the hedges which crystallized the positive mark-to-market of the hedges and enabled the firm to repurchase some of the EUR bonds. We also continue to provide hedge accounting and valuation services.