Corporate Case Study: Interest Expense & Currency Risk

June 20, 2014 Parke Shissler

Corporate Case Study: Interest Expense & Currency Risk

Our Client:

A software firm with contracts in multiple currencies, a complicated legal structure and unique debt structures.

Situation:

The company had recently increased leverage from a negligible amount to roughly 50% of its enterprise value in a recapitalization, compounding the currency risk. The company was trying to determine the best way to hedge its exposure to a CAD loan with interest payments based on a USD LIBOR index, as well as how to manage its currency risk across multiple currencies.

Summary:

Chatham Financial assisted the company in developing a hedging strategy for its debt by explaining the various hedging structures that could be used to create the appropriate hedge of the firm’s interest rate risk. To help the management team obtain an understanding of its currency risk, we worked to isolate the various cash flows by currency and ran sensitivity analysis to determine that 80% of the currency risk could be mitigated by hedging a single currency pair.

Outcome:

Chatham helped execute interest rate swaps of various tenors and types to help isolate the interest rate risk, and executed foreign currency forwards to isolate the company for foreign currency movements over the coming year. The company was able to have a clear understanding of its interest expense and foreign currency risk, which allowed it to ultimately budget and plan accordingly in advance of a volatile year.

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