Required Hedging

Over the past few years, many commercial banks have made it common practice to include a mandatory hedging requirement as a pre-condition of obtaining a credit facility for borrowers.  This specification generally details the percentage of the financing that needs to be hedged as well as the term of the hedge.  Some banks have also taken the added step of imposing additional barriers, either by restricting the type of interest rate hedge the borrower can execute or by restricting the institutions that can provide the hedge.  These limitations not only influence the economics of the hedge, but impose additional costs.  Borrowers do have choices and there are laws that restrict banks from tying certain products and services.

Mitigating interest rate risk has clear benefits for both lender and borrower, but banks have shifted the burden of risk management onto the borrower’s shoulders.  If your organization is required to hedge, the principals at Cardea Partners can identify a full suite of options available in the marketplace and can help you identify the most flexible, cost-effective solution.

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