Restructuring and Repricing your Debt

What role do existing hedges play in a refinancing? How do the new credit terms and financial covenants affect current hedges? Should Financial Sponsors be concerned about the mark-to-market values of existing hedges and how they will be treated under the new debt agreements?

Evan Spano
Evan Spano

These considerations are important as they will affect enterprise valuations and future returns from portfolio companies.  It is therefore important that consideration is given to the potential financial and commercial consequences while the company (in reality the Sponsor) still has leverage.  Too often existing hedges are ignored until they become a very expensive afterthought.

Key considerations that can minimize the overall cost of derivatives at a refinancing are:

  • understanding whether the counterparty has a right to require a termination
  • considering the possibility of blending the current hedge(s) into a new hedge(s)
  • understanding that in today’s market many term loans have LIBOR minimums.  Elimination of these LIBOR floors can prove very beneficial for future hedging, even at the cost of a higher LIBOR credit spread
  • ensuring that banks are transparent with their valuations of any existing or proposed structures.

A large number of USD and EUR denominated loans will be maturing in 2013 and 2014, leading to a substantial need for refinancing.  For those companies exploring refinancing their credit facilities and that have existing credit-intensive hedges, the mark-to-market value must be factored into the enterprise value.

In many refinancings banks will propose new hedging structures that seek to leverage their role (and thus their profitability) in the new facility.  Understanding the implications of existing hedges in a refinancing, and knowing the alternatives with respect to the new transaction, will reduce Sponsors’ costs while most effeciently managing the process.

At PMC your interests are paramount.  Please contact us if we can be of assistance.

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