Background
A leading Bahrain-based company. The company has entered into more than one leveraged interest rate derivative structure with significant negative mark to market (MtM) position that was the result of a material change in the interest rate environment and, thus, the risk profile.
The management of the company aim was to understand the current risk profile of the existing trades. The company had to choose between terminating the positions with a significant breakage cost or restructure the trades by extending their maturities.
Hedge providers share significant number of restructuring solutions and management was focusing on independently verify the most efficient and informed decision via hiring an experienced and independent third party.
Our approach
AL SALAM - MSA BAHRAIN FUND was hired to assess the situation. Our role at the pre-hedge restructuring stage was to clearly demonstrate the risk arising from the structured rate derivative portfolio and to evaluate the available alternatives. Once the recommendation was agreed, the portfolio was neutralized after a successful hedge execution with two major banks.
The mandate team carried out a thorough documentation review and produced an integrated assessment of the overall exposure, including portfolio risk breakdown/sensitivities to the most basic derivative component.
The client was able to make an informed decision after being able to clearly visualize the risk and the potential risk exposure along with applying stressing tools to gain more insights.
The recommended restructuring approach proved to be the optimal solution to achieve the goal of cost minimization and timely execution.
Outcome
AL SALAM - MSA BAHRAIN FUND has successfully coordinated two separate hedge executions with two major banks, who were parties on the original trades. Prior to execution, a series of dry-run exercises ensured pricing alignment among all stakeholders.
The outcome has not only provided the company with a tangible execution cost-saving, but also a timely execution that safeguarded it from being exposed to further market risk volatility and severe MtM deterioration.
AL SALAM - MSA BAHRAIN FUND has also demonstrated the importance of having an internal governance framework and hedging policy to guide future hedging decisions and avoid falling in the trap of a subjective decision making.
