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case study

SPECIALIST EUROPEAN REIT (FTSE 250)

Background

Multi-currency debt: EUR and GBP

Mixture of term and revolving credit facilities

200m
£200m equivalent debt facilities
£2m
Prior swap value (£2m) equivalent

Factors to consider

  • EPRA earnings and NAV
  • Libor floor in facility agreement
  • Key facility covenants
  • Wider group borrowings
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E:
T:

Our approach

Highlighted key clauses that could affect the hedging in the facility agreement, such as LIBOR floor.

Helped negotiate the removal of LIBOR floors.

Analysed the impact on EPRA Earnings and NAV of various hedge solutions.

Hedging strategy recommendation made on the basis of the EPRA earnings impact and a range of other factors.

Modelled the effect on key metrics such as ICR to show long term viability of the strategy.

Employed a process that offered recognition to relationship banks while ensuring competition.

Implications

  • As rates fall below zero, the amount payable under a swap increases.
  • The floor on the loan prevents this being offset, creating a cash flow mismatch versus the swap.
  • In EUR this creates an immediate cost.
  • The facility agreement at first included language which floored Euribor and LIBOR at zero percent. 

Benefits of our approach

  • Our hedging recommendation delivered EPRA earnings improvement while remaining agreeable with wider group borrowings to fit with the group’s balanced interest rate risk management policy.
  • The removal of the LIBOR floor helped our client avoid the need for unnecessary further hedging thereby avoiding additional costs.
  • Coordinated a competitive process to minimise execution and credit charges.
  • We delivered over £250,000 in savings on the clearing credit spread from the hedging syndicate:
    - GBP credit improved to 3.50bps (from 8.50bps initial clearing level).
    - EUR credit improved to 1.70bps (from 6.25bps initial clearing level).

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