Welcome to this ACT webinar The post-low interest rate world are you ready?

Transcription

1 Welcome to this ACT webinar The post-low interest rate world are you ready? 8 March GMT Sponsored #ACTwebinar

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3 Agenda Introduction Sarah Boyce Associate Policy & Technical Director, ACT Presentations Svenja 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 #ACTwebinar

4 Presentation 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

5 Practical aspects of interest rate execution 8 th March

6 Today s speakers Svenja Schumacher Risk Management Advisory Chatham Financial Karolina Windys Global Regulatory Advisory Chatham Financial Katherine O Brien Vice President Treasury, Dubai Aerospace Enterprise 6

7 Today s Agenda Introduction Considerations for interest rate execution Pre- and post trade documentation and regulatory aspects Q&A 7

8 Today s Agenda Introduction Considerations for interest rate execution Pre- and post trade documentation and regulatory aspects Q&A 8

9 Chatham at-a-glance 2,000 clients Corporates Belmond CRH VEON Hyperion Insurance British Land eir Ferguson Dubai Aerospace Enterprise Private equity Bain JPM Asset Mgt Blackstone Morgan Stanley Carlyle Oaktree Financial institutions Amex Santander Comerica Western Union Discover Zions Banc. Real estate Brookfield Hilton Hotels Forest City Simon Prop. Hines Starwood Expertise Derivatives experts 25+ Years, 500+ Employees Hedge accounting 35+ Accountants from Big 4 and FASB staff In-house technology 150+ Technologists on staff Scale 500 billion $ of hedges executed per year 30 million Valuations per year 620,000 Journal Entries per year 9

10 Chatham Financial corporate solutions Strategic risk assessment Hedging strategy & execution Hedge accounting Simplifies Complexity Derivative regulatory compliance Legal (ISDA) Derivative & debt valuation clients globally, including 500+ accounting clients Transaction management of $500 billion of hedges annually 10

11 DAE at a glance 1 Scale competitor (1) $14bn+of assets 384 aircraft (2) combined fleet 2 Balanced portfolio (3) 55% Narrow bodies 39% Wide bodies 6% ATR % Asia Pacific 33% 19% MEASA Europe 14% Americas 3 Long-standing global customer 113 relationships (4) airline customers 55 countries of client presence 4 Globally diversified funding ~$10bn ~ 70lenders across 16 countries 5 World class platform ~140 people (5) 30+ across 6 locations years of track record 6 Strategic, long-term ~95% ownership owned by investment corporation of dubai (6) Based in DIFC robust legal framework 1. As of Q 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 Dubai Aerospace Enterprise 11

12 DAE Historical financial highlights Total assets Total equity $4,863m $5,233m $14,911 m $1,573m $1,678m $3,066m Dec 2015 Dec 2016 Sep 2017 Dec 2015 Dec 2016 Sep 2017 Total loans and borrowings Operating cash flow $10,108 m $654m $2,768m $3,083m $230m $245m Dec 2015 Dec 2016 Sep 2017 Dec 2015 Dec 2016 Sep 2017 Note - Selected data above YTD 2017 results - results for the nine months ended 30 September, 2017 Results of AWAS effective from 17 th August, 2017 to 30 September, 2017 All figures are rounded for presentation purposes Dubai Aerospace Enterprise 12

13 Today s Agenda Introduction Considerations for interest rate execution Pre- and post trade documentation and regulatory aspects Q&A 13

14 How have interest rates developed in the past years? 8% Historical 3 mo. GBP LIBOR fixings and forward curves 7% 6% 5% 4% 3% 2% 1% 0% 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 6% Historical 3 mo. EURIBOR fixings and forward curves 5% 4% 3% 2% 1% 0% -1% 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 14

15 How does this environment affect hedging? Concerns about floors in financing More attention to interest rate movements and hedges Floors Greater focus on forward hedging IR Focus Forward hedging 15

16 Policy implications Operationalise Phase III Strategy Phase II Foundation Phase I 16

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. Dubai Aerospace Enterprise 17

18 Aligning loan terms and interest rate execution 1.90% Comparison 1M vs 3M vs 6M GBP LIBOR 1 Month GBP LIBOR 3 Month GBP LIBOR 6 Month GBP LIBOR 1.40% 0.90% 0.40% Year 1 Year 2 Year 3 Year 4 Year 5 GBP LIBOR basis 6m vs 1m GBP LIBOR 6m vs 3m GBP LIBOR 3m vs 1m GBP LIBOR 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 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: %, 1M: %) 18

19 Interest Payable Floors in Financings 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%. Cost (missed benefit on interest expense) of 1% Floor on 100m GBP Loan 100m EUR Loan 3Y 670k 3.3m 5Y 1.4m 4.6m Risk Management Challenges 1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% All Fixed Swap Only Swap + Floor 0.64% 0.82% 1.00% 1.18% 1.36% Below 1% Rates Above 1% Rates 19

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 Dubai Aerospace Enterprise 20

21 Execution mode: negotiation vs. auction A spectrum of execution methods can be used to balance competing priorities for any given trade Banking relationships Pricing efficiency COMPETITIVE AUCTION ISDA/CSA documentation Counterparty diversification Transparency DIRECT NEGOTIATION Outsourcing needs Regulatory compliance 21

22 Today s Agenda Introduction Considerations for interest rate execution Pre- and post trade documentation and regulatory aspects Q&A 22

23 ISDA documentation: important commercial aspects ISDA master agreement Long form trade confirmation Schedule to the ISDA master agreement Credit support annex Short form trade confirmation Short form trade confirmation Short form trade confirmation 23

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 24

25 EMIR requirements and proposed changes Timely confirmations Derivative 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 Reporting Trades 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 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: NFC-s: Once per quarter > 100 trades Once per year < 100 trades FCs and NFCs+: Each business day > 500 trades Once per week trades Once per quarter 50 or less 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- 25

26 MiFID II: Impact on Trading 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 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. 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 LEI (Legal Entity Identifier) requirement All entities trading derivatives will now be required to obtain and maintain an LEI. 26

27 Today s Agenda Introduction Considerations for interest rate execution Pre- and post trade documentation and regulatory aspects Q&A 27

28 Questions? Svenja Schumacher Manager, Risk Management Advisory T: Karolina Windys Director, Global Regulatory Services T: London Burdett House, 4th Floor Buckingham Street London WC2N 6DU United Kingdom Philadelphia 235 Whitehorse Lane Kennett Square, PA United States Denver 7926 S. Platte Canyon Road Littleton, CO United States Krakow ul. Kotlarska Kraków Poland Singapore 20 Cross Street China Square Central #02-16/17 Singapore, Melbourne L18, 101 Collins Street Melbourne, Australia,

29 Panel discussion Chair Sarah Boyce Associate 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 #ACTwebinar

30 Closing remarks Sarah Boyce Associate Policy & Technical Director #ACTwebinar

31 FORTHCOMING EVENTS ACT Smart Cash Management Conference March 2018 London ACT Treasury Network New York 26 March 2018 New York ACT webinar: MMF reform treasury risks, impacts, actions 19 April 2018 Online ACT Annual Conference May 2018 Liverpool ACT Treasury Forum 14 November 2018 London ACT Annual Dinner 14 November 2018 London treasurers.org/events

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