When “conservative” hedging quietly breaks credit structures
Sector: Private Credit – Infrastructure Debt
Asset Class: Infrastructure & Essential Assets (Operating Phase)
Situation Type: Operating-phase loans with mandatory interest rate hedging
Primary Issue: Capital drag and technical covenant failure driven by hedge design, not asset stress
The Situation
In infrastructure-style private credit portfolios, assets can perform exactly as expected while capital efficiency deteriorates.
In this scenario, senior secured loans were amortised predictably, cash flows remained stable, and leverage remained conservative. Yet the fund faced repeated technical covenant breaches – not because credit risk increased, but because static interest rate hedges drifted out of alignment with declining loan balances.
What appeared prudent at origination gradually became a compliance issue embedded in the covenant framework itself.
Why This Scenario is Common
This issue tends to appear quietly, years after its origination, across multiple facilities built on similar templates.
It is rarely caught in advance – and often misdiagnosed as a borrower or market problem when it is neither.
Why It Matters
Once hedge ratios are hard-coded into covenants, even benign amortisation can trigger breaches.
Cure paths typically involve real costs – margin, collateral, legal work, consent processes – without improving underlying credit quality.
The result isn’t credit loss.
It’s trapped liquidity, lost optionality, and governance paralysis at precisely the wrong time.
How This Is Typically Addressed
Rather than “fixing the hedge,” these situations require a lender-side structural review:
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Identifying where hedge mechanics and covenants are mathematically incompatible
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Quantifying capital drag created by forced cures and collateral usage
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Re-sequencing remediation to restore optionality before consuming liquidity
- Redesigning hedge and covenant interactions so amortisation no longer manufactures default risk
Primary Engagement Route
Capital Efficiency Rebuildt™ – lender-side review of hedge, covenant, collateral, and liquidity interactions
Read the IC Brief → (2-page decision summary)
Full structural narrative shared selectively on request.
Illustrative scenario for discussion purposes only. Not a transaction summary or client-specific case study.