The move provides the company with increased certainty over the cost of its debt after it secured a new USD $700 million revolving credit facility (RCF), announced earlier this week.
Via interest rate hedging, companies with loans are able to swap a variable interest rate for a fixed rate over a period of time.
In July, London-listed HSF noted that rising interest rates were driving up the borrowing costs on its maxed-out $600 billion debt package.
That prompted the company to review its leverage structure at the time as it sought to ease its interest rate risk.
Said review resulted in a five-year $700 million revolving credit facility announced on Monday (October 3). Citibank was lead arranger on that RCF, which HSF said would help to curb its interest rate risk.
HSF on Wednesday (October 5) said it was additionally pursuing – now completed – interest rate swap agreements on its debts.
As a result of those swaps, interest on all of HSF’s drawn debt is now fixed at 5.71%, including debt margin, until January 2, 2023.
From that point on, the company will enter into interest rate swaps to hedge $540 million of its debt.
Of that $540 million total, $340 million will be hedged until the RCF matures on September 30, 2027 at a fixed rate of 5.67% including debt margin.
A further $200 million will be hedged until January 3, 2026 at a fixed rate of 5.89%, including debt margin.
The balance remains unhedged after that date to provide flexibility in the operation of the RCF, the company added.
HSF’s previous $600 million facility, in contrast, had a credit margin of 3.25% over the floating rate of the London Interbank Offered Rate (LIBOR).
At the time of publication, the one-month LIBOR sits at 3.185% – meaning that, without its new RCF and fixed interest rates, Hipgnosis would currently be paying a 6.43% rate against its debt.
With its new rate swaps now secured, HSF has protected itself against the possibility of the LIBOR (itself a reflection of interest rates at various global banks) rising higher in future.
Merck Mercuriadis, Founder and CEO of Hipgnosis Song Management, said of HSF’s new interest rate hedging transactions: “Together with the completion of our new Revolving Credit Facility, executing these swaps concludes our refinancing.
“As debt markets have become increasingly unpredictable during the course of 2022, these new agreements provide long-term certainty and a stable platform to take advantage of the music industry’s tailwinds.”
“As debt markets have become increasingly unpredictable during the course of 2022, these new agreements provide long term certainty and a stable platform to take advantage of the music industry’s tailwinds.”
Merck Mercuriadis, Hipgnosis Song Management
HCF clarified today that the cost of arranging both the RCF and the interest rate hedge has been included in the principal amount under the RCF.
This provides the company with certainty regarding the amount of its fixed interest payment obligations over the term of those contracts.
Interest rate hedging has been one of the most viable solutions for companies that are dealing with millions of dollars in debt as central banks around the world continue to hike interest rates in a bid to tame soaring inflation.
In addition to Hipgnosis Songs Fund, the Merck Mercuriadis-founded Hipgnosis group includes investment advisory firm Hipgnosis Song Management (HSM), and Hipgnosis Songs Capital (HSC).
The latter was formed via $1 billion in backing from private equity giant Blackstone in 2021.Music Business Worldwide