Interest Rate Derivatives for Leveraged Debt Management

This course may be interesting to bankers who work with Private equity, in Leveraged finance, Debt Capital Markets or other areas facing commodity risks where derivatives may be used for hedging or financing (such as Oil & Gas), and to Financial sponsors.

Private equity firms say lenders are now requiring them to lock in (more of) their interest expense as a condition to lending.  This means using derivatives, typically interest rate swaps.  In the first part of the class, using a model of a deal, we will explore the risk due to interest rate volatility, from the equity sponsor and potential creditors’ view points.  We will look at what interest rate swaps are, and how they may mitigate the deal risks.  We will expand from the LBO case and look at the use of interest rate swaps for other financing risk management as well.  We will also discuss appropriate drafting in debt documentation.  At the end of this first part, participants should have an understanding of the risk due to changing yield curve, sources of data for long-term rates, how to structure a deal with an interest rate swap hedge, and the swap’s pros and cons.  In the second part of the session, we will look at other derivatives which may also prove useful.   The seminar will be part lecture and exercises (so we can see how the derivatives work), culminating in a case study where participants, in teams, will come up with their hedging proposal for a client. 

Class length:  ½ day