Financial risks (relating to FX, Interest Rate (IR), Commodities/Energy and Inflation) arising from M&As (Public or Private), IPOs or Project Finance can be complex to hedge. Those so-called event-driven risks may have several levels of uncertainty:
• the exposure itself (contingent to the success/failure of the underlying deal)
• the amount (for example in a tender situation or for deferred considerations/earnouts)
• the tenor (closing date is usually unknown at signing).
A deal contingent hedge is a cost-effective solution to cover those risks and allows the client to walk away from the hedging agreement if the deal falls through as a result of pre-defined conditions precedent (CPs) not being met. For example, Deal Contingent hedges confer the ability to lock in the cost of an acquisition in a foreign currency (FX risk), or to ensure that financing costs of the transaction are pre-hedged (IR risk).
In both cases no cost is incurred if the deal does not complete as a result of CPs not being met. Since deal contingents are tailor-made derivatives, pricing is by definition less transparent than for vanilla products. Hence we will in most circumstances arrange a tender process between competing banks.
Very often, deal contingent hedging is required at a time when management time is at a premium. Speed is therefore of the essence. From designing an optimal hedging strategy to implementation with competitive pricing, our experience and contacts with the best banks in the market mean we are able to offer a streamlined and transparent process with a quick turnaround.