Hedging: the return

According to some bankers, due the heightened currency volatility and the resulting record number of cross-border mergers and acquisitions, hedging products are being favoured more and more.

Despite being an unsettling time recently because of events such as Black Monday in China and speculation surrounding the US interest rate rise being imminent, the number of acquisitions has grown since companies have more funding now, Reuters reports.

An example of hedging products that have gained popularity would be Deal-Contingent Forwards (DCFs) because M&A participants provide insurance against big losses. Reuters reports that demand for DCFs and other hedging products has grown by more than 50% over the past year.

Head of interest rate and forex structuring at Asia ex-Japan for BNP Paribas, Simon Lau, believes that there will be a strong desire to hedge risk during M&A transactions as currency markets continue to be more volatile.

However, deals that involve hedging are kept secret by banks in order to avoid competition, but some relationships have come to the surface, for example, when Nomura Holdings sold DCFs to SAB Miller. “Japan’s Nomura Holdings earned about $12 million in fees by selling DCFs when SAB Miller bought Australian beer maker Foster’s Group for $10.2 billion in 2011. Nomura earned more than the $8.5 million each of SAB’s four M&A advisers made, according to Freeman & Co estimates,” Reuters reported.

Reuters explains that the DCF is similar to a currency forward contract which is what is usually used for hedging, but it allows for a client to walk away from an agreement if something untoward happens. Nevertheless, companies are uncomfortable taking forward hedge because they would have to pay upfront, regardless of whether or not the deal goes through or not. The DCF allows clients to walk away when they want to.

DFCs have only just gained popularity as FX markets were not stable following the aftermath of the 2008 financial crisis.


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