Guide to hedging within a financing context—for the financing lawyer
Produced in partnership with Ruth Marken and Mike Tanner of CMS
Guide to hedging within a financing context—for the financing lawyer

The following Banking & Finance guidance note Produced in partnership with Ruth Marken and Mike Tanner of CMS provides comprehensive and up to date legal information covering:

  • Guide to hedging within a financing context—for the financing lawyer
  • Facility agreement
  • Hedging strategy letter
  • Intercreditor agreement
  • Security agreement/debenture
  • Fixed rate facilities
  • Regulatory issues

Facility agreement

Hedging clause

Some facility agreements include a clause setting out what is required in terms of hedging in a particular transaction (see, for example, the drafting options in clause 8.3 of the Loan Market Association (LMA) real estate finance investment facility agreement—the first option is to be used where hedging is to be by way of an interest rate swap and the second option is to be used where hedging is to be by way of an interest rate cap). Other facility agreements do not go into detail on hedging but use the intercreditor agreement or a 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). Where this is the case, the points below apply equally for whichever document deals with the hedging in detail.

What to think about in relation to hedging requirements:

  1. What percentage of the loans will be hedged?

    1. Hedging documentation refers to 'notional amount' when looking at the amount hedged.

    2. Where a loan is to be fully hedged, the facility agreement will state that the notional amount under the hedge shall be at least 100% of the aggregate loans.

    3. It may be commercially agreed that a smaller proportion of the