Managing financial risk is a core activity of most businesses. Risk associated with changes in interest rates, exchange rates and commodity prices can materialize into losses that can jeopardize core business activities. Prudent management of these risks can create competitive advantage or ensure project profitability. The proper analysis, quantification and understanding of the inherent risk is key to appropriate management. Kensington Capital Advisors has the experience and skill needed to guide clients through the identification and quantification process that is the precursor to any hedging transaction or program.
Once risks have been properly identified, opportunities to mitigate these risks through the use of financial derivatives can be considered. It is critically important to understand the capabilities and limitations of any product used to mitigate risk. If the hedging vehicle is not structured and priced appropriately, the ability to achieve the desired goal will be compromised. Kensington Capital Advisors can ensure that our clients understand all of the opportunities that are available to them, that the hedge is properly structured and competitively priced. Most importantly, limitations in hedge agreements and risks associated with the hedging contracts are analyzed and evaluated.
Kensington’s clients benefit from our significant structuring experience, access to the marketplace and superior systems capabilities. These qualities combine to ensure our clients risk management goals are achieved efficiently and effectively.
Representative types of clients include:
Interest Rate Caps are often required hedges for variable rate loans, including many popular Fannie Mae and Freddie Mac loan programs. Other borrowers may elect to use an interest rate cap to hedge all or a portion of its interest rate risk associated with variable rate loans or bonds. Charlie Jacobs leads Kensington’s Interest Rate Cap Bidding and Advisory Practice.
Kensington provides comprehensive services to assist borrowers efficiently execute interest rate caps, including pre-bid Anti-Money Laundering and Dodd-Frank compliance. In connection with each interest rate cap, Kensington prepares detailed bid specifications outlining the relevant business and legal terms, incorporating any applicable lender requirements. Charlie works with borrowers to collect any required Anti-Money Laundering compliance documentation.
Kensington works together with a borrower’s legal counsel to assist borrower’s complete pre-bid Dodd-Frank bilateral agreements or compliance using the ISDA Dodd-Frank Protocol Agreements. Following execution of a new interest rate cap, Kensington reviews the Rate Cap Agreement and related documentation to ensure the accuracy of trade documentation.
Typically, once a variable rate loan is repaid, any associated interest rate cap can be terminated early. Depending upon the terms of the interest rate cap and prevailing market rates, a borrower may be due a termination payment from the cap seller. Kensington assists borrowers terminate caps by coordinating any required compliance, lender consents, along with price verification.
Contact Charlie Jacobs for additional information on interest rate cap bidding and termination services.
Kensington is a leading Independent Registered Municipal Advisor (IRMA) to borrowers utilizing either primary or secondary market total return swaps (TRS). Total Return Swap financing structures are often used as an alternative way to finance long-term assets on a tax-exempt basis, with longer credit commitment terms when compared to letter of credit-backed low-floaters or LIBOR-indexed direct placed bonds.
Kensington assists with structuring and pricing both the TRS and bond where the financial institution buying the bonds is also the TRS counterparty. Kensington’s professionals work with clients throughout the entire process from regulatory compliance to customizing features of the underlying bonds and the interplay of those characteristics with the structure of the total return swap.
In a typical TRS engagement, Kensington guides clients through the regulatory compliance and structuring elements of their financing. We assist with the identification and preparation of regulatory paperwork and agreements, mandated by Dodd-Frank and other legislation, that are required prior to executing a TRS. A TRS is governed by an ISDA Master Agreement, Schedule and potentially Credit Support Annex thereto. Kensington works with clients and their legal counsel to negotiate ISDA Documents prior to transaction execution.
In connection with the underlying bond, we coordinate with bond and tax-counsel in regards to the bond documents and pricing characteristics and advise clients concerning related effects on the TRS. Part and parcel is the detailed structuring and pricing of the tax-exempt bond, including call optionality and security and sources of repayment features. Careful attention is paid to the structuring and pricing of the total return swap, including negotiating additional language and terms in the TRS confirmation.
Borrowers often have multiple sources of financing available for any given project or capital need. These alternatives may vary significantly in tenor, interest rate mode, index, credit terms and tax treatment, to name a few. These choices are difficult to evaluate without the analytical toolbox to value alternatives between one variable and another. Using its experience with all types of financings and the quantitative capabilities driven by its derivative valuation systems, Kensington Capital Advisors can assist and advise on the most cost effective alternatives available.
Many differences inherent in any financing vehicle can be analyzed using the same benchmarks that exist to value derivative contracts. For example, forward interest rate, tax ratio and volatility assumptions that are used in the derivative markets can also be applied to normalize multiple financing scenarios. Kensington’s analytical capabilities in this area are often called on by clients to help make informed capital raising decisions.