CREFC guide aims to solve complex hedging puzzle

The Commercial Real Estate Finance Council Europe has tackled the problematic issue of interest rate hedging by publish­ing Guidelines for Interest Rate Hedging in European Commercial Real Estate Finance Transactions.

A working group headed by Chatham Financial’s Mark Battistoni and Partha Pal drew up 12 principles to help market participants analyse and structure hedging arrangements such as swaps, caps and options.

“Hedging is becoming more complex, nuanced and expensive, proportionally, affected by regulatory and banking sector changes,” said Battistoni, who noted the divide between lenders and hedge providers.

With new entrants such as debt funds and insurers entering the market, borrowers may get different pieces of debt from a range of providers, some of which may not be able to include interest rate swaps, as banks with derivatives desks do.

The guidelines are not hard and fast rules, but issues that borrowers, lenders and hedge providers should consider in structuring a deal. One point concerns ways of considering which kind of inter­est rate hedging may be suitable.

“Hedging is here to stay, as lenders are more prudent than ever,” said Battistoni. “But there was agreement in the group that financial covenants are objective measures and tying hedging to them is sensible. We are going to see more of that.”

The guidelines are being presented in a seminar at 5pm on 17 July at BlackRock’s 12 Throgmorton Avenue, EC2 HQ. The session will also ask how senior debt funds can address hedging in their loans.

To register, contact, +44 (0) 20 3651 5568