In Practice: Key Hedging Considerations in Negotiating Intercreditor Terms

Sophisticated borrowers often wield significant leverage when negotiating the terms of their financings. However, what is often overlooked in that negotiation is the importance of retaining flexibility for the borrower to be able to offer attractive terms to prospective hedge providers (Hedge Providers).

This can happen because the identity of Hedge Providers as well as the preferred hedging strategy are often unknown at the point of negotiating and signing the terms of the intercreditor agreement (ICA). As a result, it is not until work begins on the hedging agreements that Hedge Provider feedback on the terms derived from the ICA is obtained. By this point it will likely be too late or costly to amend the terms of the ICA, with the result that it is difficult or impossible for the borrower to implement their preferred hedging strategy.

To ensure that borrowers have sufficient flexibility to implement a cost-effective and beneficial hedging strategy, the likely requirements and commercial needs of Hedge Providers should be taken into account when agreeing the terms of an ICA.