Welcome to this ACT webinar

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1 Welcome to this ACT webinar Commonly asked questions on interest rate hedging 13 October BST Sponsored by Sponsored by

2 Introduction James Lockyer Development Director ACT

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4 Agenda Introduction James Lockyer Development Director, ACT Presentation from Chatham Financial and Brakes Group Paolo Esposito Director of European Corporate Advisory, Chatham Financial John Legg Treasury Manager, Brakes Group Panel discussion and Q&A

5 Presentations from Chatham Financial and Brakes Group Paolo Esposito Director of European Corporate Advisory Chatham Financial John Legg Treasury Manager Brakes Group

6 Common Questions on Interest Rate Risk Management October 13 th, 2015

7 The Chatham Difference - independent hedging advisor Interest Rate Hedging FX Hedging Commodity Hedging Hedge Accounting Advisory Regulatory Advisory Debt & Capital Advisory Full web-based platform Financial risk mgmt modules Debt management modules Covered by SSAE 16 audit Serving >1600 clients annually $2.5 trillion notional transacted 6 Locations globally in Europe, U.S., Asia and Australia

8 Today s Agenda Common Questions on IR Risk Management Case Study: Brakes Group Q&A

9 Today s Agenda Common Questions on IR Risk Management Case Study: Brakes Group Q&A

10 How to determine the most appropriate hedging strategy? Accounting impact Capital Structure Business Profile Product choice Financial restrictions Start Rates and Volatility Peer Group

11 How to determine the most appropriate hedging strategy? 1.30% Hedging strategy comparison 1.20% 1.10% 1.00% 100% Swap 60% Swap 1% 2% 0.90% 0.80% 0.70% 0.60% -2 SD -1 SD Current +1 SD +2 SD

12 How to determine the right fix/floating debt mix? Floating Fixed 0% 100%

13 How to determine the right fix/floating debt mix? Company Peer 1 Peer 2 Peer 3 Peer 4 Peer 5 Peer 6 Peer 7 4.1% 50.0% 50.0% 100% 80.0% 20.0% 78.7% 21.3% 77.8% 22.2% 74.0% 26.0% 51.7% 48.3% 95.9% Fixed Fixed Floating Floating Total Debt (MM) Debt/Assets $16, % $14,000 85% Total Debt Debt / Assets Floating Debt / Assets 90.0% $12, % 70.0% $10,000 56% 60.0% $8,000 $6,000 $4,000 $2,000 $- 39% 40% 28% 20% 21% 17% 13% 20% 10% 9% 7% 6% 4% 0% Company Peer 1 Peer 2 Peer 3 Peer 4 Peer 5 Peer 6 Peer % 40.0% 30.0% 20.0% 10.0% 0.0%

14 How to achieve the desired debt capital structure?

15 How to achieve the desired debt currency denomination? Credit Spread 2.0% 1.0%? Credit Spread 2.0% 1.0% Borrowing in USD Borrowing in EUR Cross Currency Swap Converting to EUR

16 How to achieve the desired debt currency denomination? 20 Historical EURUSD CCS basis EURUSD 1y EURUSD 5y CCS Flight to safety into U.S. treasuries Renewed worries over Greece /01/07 01/01/08 12/31/08 12/31/09 12/31/10 12/31/11 12/30/12 12/30/13 12/30/14 12/30/15

17 How to deal with the most common hedging challenges? Embedded derivatives Hedging letter constraints Pricing Regulation

18 Today s Agenda Common Questions on IR Risk Management Case Study: Brakes Group Q&A

19 Brakes Group refinancing and hedging Brakes has 3bn+ revenue and operates in UK, France and Sweden High leverage due to private equity ownership Business has very strong cash generation, however interest costs utilise a significant part of this cash flow Hedging considerations: desire to protect cash flow, maintain strong covenant headroom, and minimise cash pay interest risk, at minimum cost retain some flexibility for future changes in capital/debt structure Take advantage of historically low interest rates, risk considerable if rates increase faster than expectations We asked Chatham Financial to advise us as we went through a refinancing process, specifically to assist in the decision making process on fixed/floating rate debt, and linked interest rate hedges

20 Brakes Group refinancing and hedging Brakes decided on a mixed strategy of fixed and floating rate debt + interest rate Caps Half of debt fixed rate, 60% of the remainder hedged through interest rate caps: 50% ( 450m) of Senior debt refinanced at fixed interest rate 38% ( 340m) floating rate debt, 12% ( 150m) Euro floating rate debt Sterling interest rate cap on 170m notional for 3 years, deferred premium Euro interest rate cap on 150m notional for 3 years, deferred premium Leaving 20% un-hedged allows some flexibility if circumstances lead to debt reduction, whilst still removing the majority of the risk. Caps also allow us to take advantage of the low rates in the short term, deferred premium maintains current cash and liquidity position Chatham arranged execution enabling refinement of the final price by several bps, and assisted in completing ISDA documentation, they also continue to provide support with all aspects of IFRS hedge accounting on interest rate, foreign exchange and commodities hedges

21 Today s Agenda Common Questions on IR Risk Management Case Study: Brakes Group Q&A

22 Questions? Paolo Esposito Executive Director, European Corporate Advisory T: +44 (0) Kennett Square 235 Whitehorse Lane Kennett Square, PA London Burdett House, 4th Floor Buckingham Street London WC2N 6DU United Kingdom +44 (0) Denver West San Juan Way, Ste 150 Littleton, CO United States Krakow ul. Rakowicka 7, III p Kraków Poland +48 (0) Singapore 20 Cross Street China Square Central #02-16/17 Singapore, Sydney L8, 66 Hunter Street Sydney, Australia,

23 The panel Chair James Lockyer Development Director, ACT Speakers Paolo Esposito Director of European Corporate Advisory, Chatham Financial John Legg Treasury Manager, Brakes Group

24 FORTHCOMING EVENTS ACT webinar: know your third party compliance 22 October 2015 webinar ACT Corporate Funding Conference 28 October 2015 London ACT Breakfast Briefing: debt capital markets 5 November 2015 London ACT Annual Dinner 11 November 2015 London ACT Middle East Annual Conference November 2015 Dubai ACT Cash Management Conference February 2016 London treasurers.org/events

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