FX deal-contingent hedging for a large private equity fund
Benoit Duhil de Benaze
Managing DirectorBenoit Duhil de Benaze is Managing Director, Financial Risk Advisory at Chatham Financial, leading EMEA and advising clients on interest rate and FX risk, with deep deal-contingent expertise.
Summary
A recent example of deal-contingent hedging for a large European private equity fund.
Background
A large EUR PE fund was acquiring a UK business with a consideration payable in GBP.
Equity for the transaction was denominated into EUR giving rise to FX risk between signing and closing of the acquisition price.
The deal was subject to regulatory approval which implied that the risk of the acquisition failing to complete was low.
The client had the choice between eight deal-contingent providers (inbounds and banks involved in the deal).
Our Approach
Chatham conducted an independent review of the sales and purchase agreement (SPA) to offer two alternatives for implementation achieving different objectives and timelines.
We managed and coordinated an efficient process with a tight schedule (three business days to trade) with the client, the selected banks, and all other parties involved (M&A lawyer for due diligence and a derivatives lawyer to review the deal confirmation).
We provided additional input during the process: deal-contingent option discussion, flexibility to settle before closing, and other commercial points.
Finally, Chatham conducted live benchmarking during implementation of the trade ensuring efficient, transparent pricing was achieved.
Benefits
A tailor-made process to the underlying M&A situation, the banks involved, and the size of market risk in order to create the best pricing environment, while limiting the amount of work/resources on the client side.
The deadline for implementation was very tight.
Highly attractive pricing with a deal-contingent premium of less than 20% of the at-the-money option.
The flexible settlement mechanism allowed for the delivery of the contract at any date between the first and the long-stop date at no additional cost.
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This material has been created by Chatham Financial Europe, Ltd. and is intended for a non-U.S. audience. Chatham Financial Europe, Ltd. is authorised and regulated by the Financial Conduct Authority of the United Kingdom with reference number 197251.
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit cf.com/legal-notices.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.
