Post on 05-Jun-2020
Welcome to this ACT webinarThe post-low interest rate world –are you ready?
8 March 2018 | 12.30-13.15 GMT
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Agenda
IntroductionSarah BoyceAssociate Policy & Technical Director, ACT
PresentationsSvenja Schumacher, Manager, Risk Management Advisory, Chatham Financial Europe
Karolina Windys, Director Global Regulatory Services, Chatham Financial Europe
Katherine O'Brien, VP Treasury, Dubai Aerospace Enterprise
Panel discussion
@actupdate#ACTwebinar
Presentation
Katherine O'Brien VP Treasury Dubai Aerospace Enterprise
Svenja SchumacherManager, Risk Management AdvisoryChatham Financial Europe
Karolina WindysDirector Global Regulatory Services Chatham Financial Europe
5
8th March 2018
Practical aspects of interest rate execution
6
Svenja Schumacher
Risk Management Advisory
Chatham Financial
Katherine O’Brien
Vice President Treasury,
Dubai Aerospace Enterprise
Karolina Windys
Global Regulatory Advisory
Chatham Financial
Today’s speakers
7
Introduction
Considerations for interest rate execution
Pre- and post trade documentation and regulatory aspects
Q&A
Today’s Agenda
8
Introduction
Considerations for interest rate execution
Pre- and post trade documentation and regulatory aspects
Q&A
Today’s Agenda
9
Chatham at-a-glance
Corporates▪ Belmond ▪ CRH▪ VEON▪ British Land▪ Ferguson
▪ Hyperion Insurance▪ eir▪ Dubai Aerospace
Enterprise
▪ Bain ▪ JPM Asset Mgt▪ Blackstone ▪ Morgan Stanley▪ Carlyle ▪ Oaktree
Private equity
Financial institutions▪ Amex ▪ Santander▪ Comerica ▪ Western Union▪ Discover ▪ Zions Banc.
▪ Brookfield ▪ Hilton Hotels▪ Forest City ▪ Simon Prop.▪ Hines ▪ Starwood
Real estate
Expertise
30 millionValuations per year
620,000Journal Entries per year
Scale
500 billion$ of hedges executed per year
Derivatives experts▪ 25+ Years, 500+ Employees
Hedge accounting ▪ 35+ Accountants from Big 4 and FASB staff
In-house technology ▪ 150+ Technologists on staff
2,000clients
10
Chatham Financial – corporate solutions
Hedging strategy& execution
Hedge accounting
Derivative & debt valuation
Strategic risk assessment
2000+ clients globally, including 500+ accounting clientsTransaction management of $500 billion of hedges annually
Derivative regulatory compliance
Legal (ISDA)
Simplifies Complexity
© Dubai Aerospace Enterprise
DAE at a glance
~$10bn ~ 70 lenders
across 16 countries
Scale competitor (1) $14bn+of assets
World class platform 30+years of track record
~140 people (5)
across 6 locations
1. As of Q3 2017. 2. Combined fleet included owned, managed and committed aircraft.
3. Weighted by net book value of the owned and managed aircraft only
4. Includes managed aircraft
5. Excludes DAE Engineering
6. Includes consolidated ICD ownership
55countries of client presence
Long-standing
global customer
relationships (4)
113airline customers
Balanced portfolio (3)
55%Narrow bodies
39%Wide
bodies
6%ATR 72-600
1
2
3
4
5
Strategic, long-term
ownership~95%
owned by investment corporation of dubai (6)
6
11
384 aircraft (2)
combined fleet
Based in DIFCrobust legal framework
Globally diversified funding4
34%Asia
Pacific
33% 19%MEASA Europe
14%Americas
© Dubai Aerospace Enterprise 12
DAE | Historical financial highlights
Note - Selected data above
• YTD 2017 results - results for the nine months ended 30 September, 2017
• Results of AWAS effective from 17th August, 2017 to 30 September, 2017
• All figures are rounded for presentation purposes
$2,768m $3,083m
$10,108m
Dec 2015 Dec 2016 Sep 2017
$4,863m $5,233m
$14,911m
Dec 2015 Dec 2016 Sep 2017
$230m $245m
$654m
Dec 2015 Dec 2016 Sep 2017
$1,573m $1,678m
$3,066m
Dec 2015 Dec 2016 Sep 2017
Total loans and borrowings
Total assets Total equity
Operating cash flow
13
Introduction
Considerations for interest rate execution
Pre- and post trade documentation and regulatory aspects
Q&A
Today’s Agenda
14
How have interest rates developed in the past years?
-1%
0%
1%
2%
3%
4%
5%
6%
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22
Historical 3 mo. EURIBOR fixings and forward curves
0%
1%
2%
3%
4%
5%
6%
7%
8%
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22
Historical 3 mo. GBP LIBOR fixings and forward curves
15
How does this environment affect hedging?
More attention to interest rate movements and hedges
Greater focus on forward hedging
Concerns about floors in financing
Floors
Forward hedging
IR Focus
16
Policy implications
Strategy
Operationalise
Foundation
Phase I
Phase II
Phase III
© Dubai Aerospace Enterprise 17
DAE | Financing
Financing & hedging
Debt split is ~ 65% fixed, 35% variable, policy is to be >90% ‘matched’ / ‘hedged’
Derivative products used:
Natural hedges
Vanilla interest rate swaps
Interest rate caps
Forward-starting cancellable swaps
Interest rate swaptions
FX forwards
Large-ticket transactional timing exposures are the most challenging as we seek to
offset any exposure but must maintain / stay within transaction economics.
18
Aligning loan terms and interest rate execution
• By switching from a 6 month index to a 1 month index (if cash liquidity allows this), there can be savings of approx. 11bps per year on a 5 year swap with bullet notional. (6M: 1.3394%, 1M: 1.2285%)
0.40%
0.90%
1.40%
1.90%
Year 1 Year 2 Year 3 Year 4 Year 5
Comparison 1M vs 3M vs 6M GBP LIBOR
1 Month GBP LIBOR 3 Month GBP LIBOR 6 Month GBP LIBOR
0
10
20
30
40
50
60
70
Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18
GBP LIBOR basis
6m vs 1m GBP LIBOR 6m vs 3m GBP LIBOR 3m vs 1m GBP LIBOR
19
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
0.64% 0.82% 1.00% 1.18% 1.36%
Swap Only
Swap + Floor
Floors in Financings
Cost (missed benefit on interest expense) of 1% Floor on
GBP LIBOR means the applicable Screen Rate as of the Specified Time for GBP and for a period equal in length to the Interest Period of that Loan and if that rate is less than 1%, GBP LIBOR shall be deemed to be 1%.
“”
100m GBP Loan 100m EUR Loan
3Y £670k €3.3m
5Y £1.4m €4.6m
Risk Management Challenges
Inte
rest
Pay
able
Below 1% Rates Above 1% Rates
All Fixed
© Dubai Aerospace Enterprise 20
DAE | Financing
Documentation - Negotiation Points
On recent transactions some of the key points for discussion:
Understanding what is the Lender’s funding cost
Swap / Fixed rate Credit Spreads
Market Disruption language
LIBOR Floors (getting parallel treatment and language across both the loan
and swap documents)
Aligning on pricing – Mid v Offer
Regulatory reporting – Dodd Frank, EMIR
21
Execution mode: negotiation vs. auctionA spectrum of execution methods can be used to balance competing priorities for any given trade
Banking relationships
Pricing efficiency
ISDA/CSA documentation
COMPETITIVEAUCTION
DIRECT NEGOTIATIONCounterparty diversification
Transparency
Outsourcing needs
Regulatory compliance
22
Introduction
Considerations for interest rate execution
Pre- and post trade documentation and regulatory aspects
Q&A
Today’s Agenda
23
ISDA documentation: important commercial aspects
ISDA master agreement
Schedule to the ISDA master agreement
Short form trade confirmation
Short form trade confirmation
Short form trade confirmation
Credit support annex
Long form trade confirmation
24
ISDA documentation: important commercial aspects
Cross default
• Specified entities & credit support providers
• Cross acceleration
• Administrative carve out
• Threshold amount
• Specified indebtedness
Credit event upon merger
• Specified entities & credit support providers
• Materially weaker
• Designated event
• Merger
• Change of control
• Recapitalisation
Additional termination events
• Loan agreement is prematurely accelerated
• Loan agreement is partially or fully prepaid, repaid and/or cancelled
• Loan agreement is terminated or no longer exists
• Insolvency event
• Change of control
• No longer a lender
25
EMIR – requirements and proposed changesTimely confirmationsDerivative contracts must be confirmed by counterparties within the following deadlines:
• For FCs and NFC+s: the end of the next business day
• For NFC-: the end of the second business day
Portfolio reconciliation Counterparties required to agree before trading how portfolios regularly will be reviewed to identify any disagreements regarding key terms or valuations and reconciled. The reconciliation process must cover key trade terms and the valuation. Frequency of reconciliation:
ReportingTrades must be reported to an authorised trade repository within T+1. More that 60+ data fields per trade must be reported: common data (transactional data) & counterparty data (status, domicile, etc.). a party can accomplish reporting by:
• Reporting to a trade repository directly
• Delegating to a counterparty
• Delegating to a third party
FCs and NFCs+:
• Each business day > 500 trades
• Once per week 51-499 trades
• Once per quarter 50 or less
NFC-s:
• Once per quarter > 100 trades
• Once per year < 100 trades
Proposed revisions to EMIR include:
• A new reporting regime for NFC-s that allows for a delegation of reporting to the FCs
• An exemption of Intragroup transaction reporting in cases where one of the counterparties is an NFC-
26
MiFID II: Impact on Trading
Pre-Trade obligations
• MIFID II require Investment Firms to obtain specific consents from clients
• MIFID II also requires Investment Firms to make more disclosure to their clients
• MiFID II imposes additional obligations on Investment Firms that are required to be captured in revised Terms of Business between the Investment Firm and the client.
• MiFID II establishes four general client classifications :
• eligible counterparties
• professional clients
• opt-up professional clients and
• retail clients
Overview
• MiFID II (Market in Financial Instruments Directive II) governs provision of investment services and increase transparency in the market place.
• MIFID II went into effect on 3 January 2018. MIFID investment firms (a company’s regular occupation or business must be the provision of one or more investment services to third parties) are directly subject to MIFID II. Treasury Units are exempted from the scope of MIFID II.
• Despite not being directly subject to MIFID II, corporates will have increased indirect compliance obligations to satisfy dealers’ MIFID II compliance obligations .
LEI (Legal Entity Identifier) requirement
• All entities trading derivatives will now be required to obtain and maintain an LEI.
27
Introduction
Considerations for interest rate execution
Pre- and post trade documentation and regulatory aspects
Q&A
Today’s Agenda
28
Questions?
www.ChathamFinancial.com
Svenja Schumacher
Manager, Risk Management Advisory
• sschumacher@chathamfinancial.eu
• T: +44 20 7766 5734
Karolina Windys
Director, Global Regulatory Services
• kwindys@chathamfinancial.eu
• T: +44 20 7766 5755
LondonBurdett House, 4th Floor15-16 Buckingham StreetLondon WC2N 6DUUnited Kingdom+44 20 7766 5700
Philadelphia235 Whitehorse LaneKennett Square, PA 19348 United States+1 610 925 3120
Denver7926 S. Platte Canyon RoadLittleton, CO 80128United States+1 720 221 3500
Krakowul. Kotlarska 1131-539 KrakówPoland+48 12 349 8800
Singapore20 Cross StreetChina Square Central #02-16/17Singapore, 048422+65 6507 0680
MelbourneL18, 101 Collins StreetMelbourne, Australia, 3000+61 3 9653 7350
Panel discussion
ChairSarah BoyceAssociate Policy & Technical Director, ACT
Panellists
Katherine O'Brien, VP Treasury, Dubai Aerospace Enterprise
Svenja Schumacher, Manager, Risk Management Advisory, Chatham Financial Europe
Karolina Windys, Director Global Regulatory Services, Chatham Financial Europe
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Closing remarks
Sarah BoyceAssociate Policy & Technical DirectorACT
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FORTHCOMING EVENTS
treasurers.org/events
ACT Smart Cash Management Conference 14-15 March 2018 | London
ACT Treasury Network – New York26 March 2018 | New York
ACT webinar: MMF reform – treasury risks, impacts, actions19 April 2018 | Online
ACT Annual Conference 15-16 May 2018 | Liverpool
ACT Treasury Forum14 November 2018 | London
ACT Annual Dinner 14 November 2018 | London
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