Dealing with hedging arrangements in loan transactions

Derivatives can be used for both speculation and hedging purposes. Derivatives are frequently used to support (or “hedge”) a loan by swapping a floating interest rate under the facility agreement into a fixed rate.

This guidance note is a broad review of what hedging is, why it may be used and of the hedging documentation in loan transactions, including the ISDA documentation framework and the lender’s lawyer’s role.

See Dealing with hedging arrangements in loan transactions.

Financial derivatives — netting

Netting is a contractual arrangement between two parties. It means that the parties have agreed that, when they transact with each other, they will not have individual cross-claims against each other. Instead, at any time there will be just one amount owed by the party whose notional cross-claim is worth less than its counterparty's cross-claim.

Netting is different from set-off and is extremely important in the context of derivatives.

This guidance note explains the use of netting in derivative transactions, including payment netting and close out netting.

See Financial derivatives — netting.

Use of derivatives in a lending context — documentation issues

This guidance note explains the key documentation and drafting issues to consider when hedging risks in a lending context. It addresses issues such as:

• • hedging strategy letters or protocols;
• • hedging agreements; and
• • tailoring the swap to the risk profile.

This guidance note also considers how the loan documentation and derivative documents should be drafted to ensure they are consistent.

See Use of derivatives in a lending context — documentation issues.

Guide to hedging within a financing context — for the financing lawyer

This guidance note considers the non-ISDA documents in a loan financing transaction that deals with hedging. It analyses drafting issues such as:

• • what to think about in relation to hedging requirements;
• • hedge payments;
• • prepayments;
• • financial requirements;
• • matching; and
• • security.

See Guide to hedging within a financing context — for the financing lawyer.

Guide to hedging within a financing context — the ISDA documents

This guidance note considers the use of ISDA documents in a loan financing transaction that deals with hedging and how by considering the ISDA documentation in the light of the facility agreement and other finance documents, a consistent position can be reached which reflects the commercial agreement, rather than presenting the hedging arrangement at the end of the transaction as a condition precedent to drawdown of the loan and as a “standard” document to be executed.

See Guide to hedging within a financing context — the ISDA documents.