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.

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.

We first defined a hedging protocol to deliver a smooth, fair and transparent execution roadmap to all parties involved.

To enhance transparency and fair dealing, we ensured a competitive execution procedure was adhered to and that pricing reflected fair market rates and were in line with the agreed benchmarking protocol.

Due to the high sensitivity of the project’s KPIs to profit rates, we secured a certain notional deviation range and time buffer for the project company and utilized the financial model to measure the impact of market rates on the project’s targeted KPIs. Furthermore, we made sure the project company had the advantage of quantifying the market rates impact in advance, which in turn enhanced the project company ability to optimize the debt profile.

We along with the project team coordinated a timely execution process and conducted a series of dry-runs exercises to provide transparency to the parties involved, and ensure close attention is paid to the pre-agreed hedge protocol.

We were able to eliminate any undisclosed margins and lower the hedge margins and achieving significant saving versus the initial pricing the project received, that was reached through benchmarking each of the dry-run outcomes with our internal models and market references.

We along with the project team ensured that all documentation is executed in a timely manner, hence, the project company saved time, money and resources.

Ehata’s approach was to conduct an in-depth analysis of the existing portfolio before formulating any hedging strategy. AL SALAM - MSA BAHRAIN FUND has kept close communication during such a critical step.

The mandate team has evaluated current hedging instruments and the potential risk management approaches to manage the interest rate risk.

The demonstration included the impact of the recommended approach on various relevant KPIs and the company financial objectives.

To formulate the hedging policy, the team conducted rounds of discussions across different divisions within the company.

AL SALAM documented the governance framework’s design and assisted the client in arriving at the KPIs, as per the best industry practices, and looking at global peers.

The company became independent in terms of risk identification, quantification, and management. AL SALAM - MSA BAHRAIN FUND ensured the transfer of knowledge and working models to the client.

The hedging protocols were fully established to assist the client in negotiating fair and transparent future hedges with hedge providers. Moreover, a documented hedging policy is approved by the client to guide, monitor, and audit future hedging actions.

AL SALAM - MSA BAHRAIN FUND successfully showed the importance of having an internal governance framework and hedging policy to guide future hedging decisions and avoid falling in the trap of subjective decision making.

At the outset, Ehata’s approach was to identify the qualifying hedging instruments.

The mandate team would then analyze if non-qualifying instruments could be amended to meet IFRS9 requirements or if they were intentionally disqualified due to their immateriality.

Upon completing the first two steps, the cash flow hedge accounting started with the ‘Set-up’ Phase, which includes the full spectrum of required support, that ranges from drafting the hedge designations and measuring of ineffectiveness, to the support we offer in quantifying the effect of credit risk and preparing of accounting journal entries.

We negotiated the terms of cash flow hedge accounting designations with the company’s external auditors. The aim was to ensure they provide the group’s Treasury with the flexibility possible in future amendments to hedging instruments without jeopardizing the cash flow hedge accounting relationship.

The hedging instruments were held at a group level, while underlying loans are scattered among the group’s entities. Hence, we supported the company in the required inter-company mapping of hedged items and hedging instruments at parent and subsidiary levels.

We conducted effectiveness testing using best practices while maintaining a transparent and easy to understand methodology. Furthermore, we assisted the group in preparing yearend financial statements notes as per IFRS7, highlighting the instruments ranking on IFRS fair value hierarchy, financial performance sensitivity to interest rates, and the impact of hedging instruments on liquidity.

AL SALAM - MSA BAHRAIN FUND successfully negotiated the full hedge accounting spectrum with the company’s auditors and granted the company a flexible and repeatable hedge accounting exercise that fairly represents the group’s hedging activities in financial statements without penalizing its P&L statement with fair value swings.

We first evaluated the existing current interest rate exposure and outstanding hedging in place in light of the current market environment by looking at both sides of the balance sheet.

We then provided a clear summarization covering the outcome of the analysis, observations on the current hedging practices, and the optimal interest rate risk management strategy that is aligned with best practices and considerate of the company’s interest rate risk appetite and risk management objectives.

Such an approach enabled us to document the interest rate hedging policy and determine the parameters, controls, and KPIs. Moreover, to establish a hedging protocol that details the approved hedge counterparties, threshold limits, and methodology for allocation of hedging.

Along with the company’s team, we managed to bridge the missing link in the company’s existing market risk policy, establishing the governance framework, limits, and triggers to consistently address the company interest rate risk by keeping its risk appetite and overall financial objectives into consideration.

Facilitate the establishment of a holistic approach to identify, measure, manage, report, and monitor exposure to interest rate risk during normal and adverse market conditions. Additionally, ensure that fluctuations in interest rates will not breach any regulatory, lender, or any other relevant covenants.

Support the company staff towards being self-sufficient and independent concerning the regular reviews and assessments required as part of the interest rate risk management exercise.