Updated: Feb 14, 2025
Chief Financial Officers of companies under LBO (or MBO, OBO, etc.) – Choose the right partner for your interest rate hedging
According to the financial documentation, your company is subject to a list of commitments including:
A commitment to pledge the company's securities in favor of the bank
A commitment to hedge against the risk of interest rate increases for a minimum duration (e.g., 2 years + ) and for part of the debt (often 60%)
A commitment to subscribe to an insurance policy for key managers
A commitment to comply with several ratios (Minimum cash level, Net leverage ratio, Debt service coverage ratio, etc.)
A commitment to regularly provide reports on the company's financial situation
Etc.
These commitments are often perceived as a long list of administrative constraints. And the CFO logically seeks to fulfil them as efficiently and quickly as possible. For example, by using a broker for insurance and appointing an advisor for interest rate hedging.
However, far from being an administrative matter, the choice of an advisor to guide you through the hedging process can have significant financial consequences for the company, particularly in unfavourable scenarios such as:
Scenario 1
The advisor merely ensures compliance with the hedging obligation defined in the loan documentation, without considering the real stakes for the company
Should one, in 2021, as rates are still historically low, strictly execute the hedging obligation by purchasing 2-year caps on higher cap rates than swap rates to minimize the option premium? Or should one consider the actual (or expected) maturity of the financing to cover the real exposure? Should one, as rates rise in 2022, contract cap spreads, or worse, deactivating hedges, on the pretext that rates should not exceed 2%, then 2.5%, etc.?
The cost of a poor decision can be significant, while the difference in fees between two advisors is negligible. When your debt carries at a variable rate, the sizing of the interest rate hedge is a financial issue, not just an administrative one. And international political and financial uncertainty remains high.
Scenario 2
The advisor is not available to handle the hedge when you are ready.
The best time to reduce your risk? Right now. The second-best time? When you are ready. But if your advisor is not available to assist you then, you remain exposed to rate fluctuations against your will. Over a few weeks, such a delay can cost you several basis points.
Scenario 3
The advisor does not find the right balance between pedagogy and efficiency
Well-targeted communication will allow you to understand the stakes of the choices to be made while saving you time.
Which criteria should you rely on to select your interest rate hedging advisor? Choose the partner who:
Has real expertise, solid experience in these transactions combined with a thorough knowledge of market mechanisms.
ESTER supports more than 150 transactions every year.
Provides you with a dedicated and available team, capable of adapting to your schedule.
The ESTER team includes more than 15 consultants continuously connected to financial markets, always available to answer your questions.
Demonstrates effective pedagogy to guide your decision-making and save you time.
ESTER ensures transparency while getting straight to the point.
Grants long-term support, including post-transaction.
You can rely on ESTER in the long run.
Learn more on Interest rate PE hedging: https://www.esterfinance.com/en/couverture-du-risque-de-taux-private-equity
