Methods hedging forex risk dubai
Deal-contingent hedges can form a critical part of a risk management strategy while waiting for regulatory or other approvals. A date certain for financial close is not necessary when the deal-contingent hedge is being entered into because the hedge provider will typically work with the company to determine a suitable backstop date, which usually can be designed to match the timeframes in any permits or other project contracts. A deal-contingent hedge is similar to a vanilla forward-starting hedge with the additional provision that if the project financing does not occur as anticipated within a specified period, then the hedge ceases to exist, with no unwind payment being due.
The dealer and the borrower work with their respective counsels to customize the definition of a successful financing as well as any other legal provisions.
The financial terms of the swap such as payment dates, calculation periods and notional amounts are usually aligned with the anticipated amortization schedule of the financing. There may be further flexibility added if certain terms of the financing, such as the initial borrowing date or the expected maturity date, are not yet known. While hedge providers have historically been chosen from project lenders, not all lenders can provide deal-contingent hedges.
Deal-contingent hedge providers can be a subset of the anticipated lender group, but if the lender group has not been set, some dealers can provide deal-contingent hedges even if the company does not anticipate the hedge provider becoming a lender in the financing or the hedge provider chooses not to be a lender.
In order to determine the deal-contingent premium, the hedge provider will need to understand the financing structure and principal terms and conditions. It will need to determine how likely the closing is to occur and will look for strong economic incentives for the company to close. The assumption is the parties will be governed by the standard ISDA terms.
Alternatively, in some cases, the parties sign an ISDA master agreement, schedule and confirmation, but the papers may leave specific provisions to be negotiated later once the financing is farther along, such as negotiated events of default, termination events and covenants that are customarily included in closing date hedges.
There usually is no ISDA credit support annex or other credit support documentation for the transaction, as deal-contingent hedge obligations are generally unsecured if permitted by the new margin rules adopted by the Commodity Futures Trading Commission and US prudential regulators.
Although covenants in deal-contingent hedges are limited, the parties may negotiate certain company covenants related to achieving financial close, such as, for example, the company agreeing not to amend certain key existing project documents in a manner that could hinder the financing or the timing of financial close, agreeing not to assign certain project documents, agreeing to notify the hedge provider of circumstances that could delay the financial close, or agreeing to use commercially reasonable efforts to achieve financial close.
The deal-contingent hedge provider often negotiates a post termination settlement payment if the financial closing or similar floating rate funding is achieved within a certain period after the backstop date. The period usually ranges from six months to about two years after the backstop date.
The company, the deal-contingent hedge provider and the lenders may negotiate to move the deal-contingent hedge simultaneously upon financial close from the deal-contingent hedge provider to one or more lenders on commercial and economic terms including credit spreads acceptable to all parties. Depending on the needs of the financing arrangement, the hedge may instead be designed to be unwound with a termination being payable by the deal-contingent hedge provider or the company upon financial close, such as, for example, if the lenders insist that they be the post-closing hedge providers and are unable to agree to assumption of the existing hedge.
As with any derivative, the deal-contingent hedge documentation usually requires delivery of certain items at signing such as tax forms, corporate authorizations and incumbencies.
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