Dealing with hedging arrangements in loan transactions
Dealing with hedging arrangements in loan transactions

The following Banking & Finance guidance note provides comprehensive and up to date legal information covering:

  • Dealing with hedging arrangements in loan transactions
  • Parties
  • Hedging documentation in loan transactions
  • Reviewing the hedging documentation—the lender's lawyers' role

For information on why the parties to a loan transaction might use hedging, see Practice Note: Use of derivatives to hedge against risk in a lending context.

Parties

The parties to the hedging arrangements will be:

  1. the borrower, and

  2. the hedging bank (often known as the hedging counterparty)

The hedging bank will often be the lender, or in syndicated transactions, one of the lenders. However, the hedging bank will be acting in a different capacity to its role as lender and different teams at the bank will represent it in each capacity. For more information, see Hedging bank and lending bank.

Hedging documentation in loan transactions

Some facility agreements include a clause setting out what is required in terms of hedging in a particular transaction (see, for example, clause 8.3 of the Loan Market Association (LMA) Single Currency Term Facility Agreement for Real Estate Finance Multiproperty Investment Transactions).

Other facility agreements might not go into detail on hedging but use the intercreditor agreement or a hedging strategy letter (see Hedging strategy letter) instead to set out hedging requirements (for example, the LMA leveraged facility agreement and the LMA investment grade facilities agreements do not have a long form hedging clause).

For more informat