Welcome to this ACT webinarCommonly asked questions on interest rate hedging

• Sponsored by 13 October 2015| 12.30-13.15 BST

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Introduction

James LockyerDevelopment DirectorACT

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AgendaIntroduction

James Lockyer

Development Director, ACT

Presentation from Chatham Financial and Brakes Group

Paolo EspositoDirector of European Corporate Advisory, Chatham Financial

John LeggTreasury Manager, Brakes Group

Panel discussion and Q&A

Presentations from Chatham Financial and Brakes Group Paolo EspositoDirector of European Corporate Advisory Chatham Financial

John LeggTreasury ManagerBrakes Group

Common Questions on Interest Rate Risk Management

October 13th, 2015

The Chatham Difference - independent hedging advisor

Interest Rate Hedging FX Hedging Commodity Hedging Hedge Accounting Advisory Regulatory Advisory Debt & Capital Advisory

Full web-based platform Financial risk mgmt modules Debt management modules Covered by SSAE 16 audit

Serving >1600 clients annually $2.5 trillion notional transacted 6 Locations globally in Europe,

U.S., Asia and Australia

Common Questions on IR Risk Management

Case Study: Brakes Group

Q&A

Today’s Agenda

Common Questions on IR Risk Management

Case Study: Brakes Group

Q&A

Today’s Agenda

How to determine the most appropriate hedging strategy?

Accounting impact

Peer GroupRates and Volatility

Financial restrictions

Capital Structure

Business Profile

Start

Product choice

How to determine the most appropriate hedging strategy?

0.60%

0.70%

0.80%

0.90%

1.00%

1.10%

1.20%

1.30%

-2 SD -1 SD Current +1 SD +2 SD

100% Swap

60% Swap

Cap @ 1%

Cap @ 2%

Hedging strategy comparison

How to determine the right fix/floating debt mix?

Floating

Fixed

0% 100%

How to determine the right fix/floating debt mix?

56%

39% 40%

85%

7%13%

20% 21%28%

10% 9%17%

0%

6%4%

20%

$-

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

Company Peer 1 Peer 2 Peer 3 Peer 4 Peer 5 Peer 6 Peer 70.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

Total Debt Debt / Assets Floating Debt / Assets

Total Debt (MM) Debt/Assets

Company

Fixed

Floating

50.0%50.0%

100%

20.0%

80.0%

21.3%

78.7%

26.0%

74.0%48.3%51.7%

95.9%

4.1%

22.2%

77.8%

Peer 3Peer 2Peer 1 Peer 4 Peer 5 Peer 6 Peer 7

Fixed

Floating

How to achieve the desired debt capital structure?

Borrowing in USD Borrowing in EUR

Credit Spread 2.0%Floor @ 1.0%

Credit Spread 2.0%Floor @ 1.0%

How to achieve the desired debt currency denomination?

Converting to EUR

Cross Currency Swap

?

How to achieve the desired debt currency denomination?

-160

-140

-120

-100

-80

-60

-40

-20

0

20

01/01/07 01/01/08 12/31/08 12/31/09 12/31/10 12/31/11 12/30/12 12/30/13 12/30/14 12/30/15

EURUSD 1y

EURUSD 5y CCS

Flight to safety into U.S. treasuries Renewed worries over Greece

Historical EURUSD CCS basis

How to deal with the most common hedging challenges?

Embedded derivatives

Hedging letter constraints

Pricing

Regulation

Common Questions on IR Risk Management

Case Study: Brakes Group

Q&A

Today’s Agenda

Brakes Group refinancing and hedging

• Brakes has £3bn+ revenue and operates in UK, France and Sweden

• High leverage due to private equity ownership

• Business has very strong cash generation, however interest costs utilise a significant part of this cash flow

• Hedging considerations:

• desire to protect cash flow, maintain strong covenant headroom, and minimise cash pay interest risk, at minimum cost

• retain some flexibility for future changes in capital/debt structure• Take advantage of historically low interest rates, risk considerable if rates increase

faster than expectations

• We asked Chatham Financial to advise us as we went through a refinancing process, specifically to assist in the decision making process on fixed/floating rate debt, and linked interest rate hedges

Brakes Group refinancing and hedging

• Brakes decided on a mixed strategy of fixed and floating rate debt + interest rate Caps

• Half of debt fixed rate, 60% of the remainder hedged through interest rate caps:

• 50% (£450m) of Senior debt refinanced at fixed interest rate• 38% (£340m) £ floating rate debt, 12% (€150m) Euro floating rate debt• Sterling interest rate cap on £170m notional for 3 years, deferred premium• Euro interest rate cap on €150m notional for 3 years, deferred premium

• Leaving 20% un-hedged allows some flexibility if circumstances lead to debt reduction, whilst still removing the majority of the risk.

• Caps also allow us to take advantage of the low rates in the short term, deferred premium maintains current cash and liquidity position

• Chatham arranged execution enabling refinement of the final price by several bps, and assisted in completing ISDA documentation, they also continue to provide support with all aspects of IFRS hedge accounting on interest rate, foreign exchange and commodities hedges

Common Questions on IR Risk Management

Case Study: Brakes Group

Q&A

Today’s Agenda

Questions?www.ChathamFinancial.com

Paolo EspositoExecutive Director, European Corporate Advisorypesposito@chathamfinancial.euT: +44 (0)20 7766 5715

Kennett Square235 Whitehorse LaneKennett Square, PA 19348610.925.3120

LondonBurdett House, 4th Floor15-16 Buckingham StreetLondon WC2N 6DUUnited Kingdom+44 (0)20.7766.5700

Denver10026 West San Juan Way, Ste 150Littleton, CO 80127United States720.221.3500

Krakowul. Rakowicka 7, III p.31-511 KrakówPoland+48 (0)12.294.6160

Singapore20 Cross StreetChina Square Central #02-16/17Singapore, 048422+65 6507.0680

SydneyL8, 66 Hunter StreetSydney, Australia, 2000+61 2 8003.4240

15-0016

The panel

Chair

James Lockyer

Development Director, ACT

Speakers

Paolo EspositoDirector of European Corporate Advisory, Chatham Financial

John LeggTreasury Manager, Brakes Group

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