POLSTR in Business Valuation and M&A Transactions: How Will the Reform Affect Financial Models?
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Document tabs with a “Due Diligence” label in the foreground, symbolising M&A transaction analysis and the assessment of POLSTR’s impact on financing and transaction terms.
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POLSTR in Business Valuation and M&A Transactions: How Will the Reform Affect Financial Models?

Document tabs with a “Due Diligence” label in the foreground, symbolising M&A transaction analysis and the assessment of POLSTR’s impact on financing and transaction terms.

The use of POLSTR in business valuation does not automatically alter a company’s value. However, the reform changes the inputs used to forecast the cost of debt, value financial instruments, assess covenants and calculate equity value. In M&A transactions, it may therefore affect both the DCF model and the purchase price adjustment mechanism.

The transition from WIBOR to POLSTR, the Polish Short Term Rate, changes the inputs used to forecast the cost of debt, value financial instruments, assess covenants and calculate equity value. In an M&A process, it may consequently affect both the DCF model and the purchase price adjustment mechanism.

The reform will be implemented gradually. WIBOR 1M, 3M and 6M are expected to remain available for legacy portfolios until the end of 2036. From 2027 onwards, however, they should no longer be used in new agreements. For many years, financial models will therefore need to accommodate financing based on WIBOR, POLSTR, fixed rates and hedging instruments in parallel. (1)

POLSTR in DCF Valuation: The Cost of Debt Must Reflect Actual Financing Conditions

In a DCF valuation based on FCFF (Free cash flow to the firm), cash flows are forecast before financing costs. The impact of debt is reflected through assumptions concerning the cost of debt and the capital structure incorporated into WACC. Interest expense therefore does not reduce FCFF. Deducting it would result in the cost of financing being recognised twice.

Following the reform, the cost of debt, as an element of corporate financial planning, should reflect the new terms on which the company can obtain financing during the forecast period. The model should account for the expected POLSTR trajectory, the credit margin, the adjustment spread applicable to converted agreements, hedging costs, the maturity profile and refinancing risk.

It would be incorrect to replace WIBOR 3M mechanically with the current reading of the overnight POLSTR rate. An overnight rate does not, in itself, provide an appropriate proxy for the long-term cost of debt. The financial model should use an interest rate curve or scenarios consistent with the forecast horizon. For the terminal value, it should apply assumptions that can be sustained over the long term.

Consistency must also be maintained. Cash flows and the discount rate must be expressed in the same currency and on either a nominal or real basis. They must also reflect risk consistently. International guidance on the cost of capital identifies this alignment as one of the fundamental principles of DCF modelling. (2)

FCFE: The Impact of POLSTR Is More Direct

W modelu opartym o FCFE (Free Cash Flow to Equity): interest payments and debt repayments directly affect the cash flows available to equity holders. The reform therefore requires a detailed schedule for each instrument, covering reset dates, interest periods, lookback conventions, margins, adjustment spreads, amortisation and refinancing.

The transition years require particular attention. An existing loan may remain linked to WIBOR, while new investment financing or refinancing may already be based on POLSTR. The application of  single interest rate for the entire debt portfolio would distort the interest expense profile, the tax shield and liquidity risk.

POLSTR in Business Valuation: The Impact on Enterprise Value and Equity Value

POLSTR becomes relevant to business valuation when the reform affects cash flows, financing costs or the level of risk. A change in the benchmark should not, in itself, be presented as an automatic adjustment to enterprise value. Operating value changes only when the reform affects cash flows or the level of risk reflected in the discount rate. A more direct effect may arise when converting enterprise value into equity value.

The net debt calculation should include an analysis of:

  • accrued but unpaid interest;
  • the fair value of swaps, caps and other derivative instruments;
  • early repayment, refinancing or security amendment fees;
  • liabilities arising from cash-pooling arrangements and intragroup loans;
  • amendment costs and the effects of mismatches between debt and hedging instruments.

Double counting must be avoided. If the cash flow forecast already includes the cost of converting or terminating an instrument, the same impact should not automatically be recognised again as a debt-like item.

POLSTR in Financial and Legal Due Diligence

In a company sale process, the analysis should cover not only the list of agreements linked to WIBOR, but also the relationships between those agreements. Particular attention should be paid to their connections with swaps, cash-pooling arrangements, pledges, guarantees and covenants.

As most legacy loan agreements are expected to expire naturally rather than be automatically transitioned, benchmark replacement clauses are particularly important, especially for financing arrangements extending beyond 2036.

As part of the legal due diligence, the provisions governing the replacement of WIBOR, the need to enter into amendments, and the consistency of clauses across loan agreements, security documents and derivative instruments should be reviewed.

In financial due diligence  the impact of POLSTR on interest expense, financing costs, collateral values, liquidity and financial covenants should be assessed. The analysis should also cover the POLSTR compounding methodology, the observation shift and adjustment spread, as well as the readiness of the company’s systems and operational processes. (3)(4)

Locked Box or Completion Accounts?

In a completion accounts model  interest accrued up to the M&A transaction closing date, the valuation of derivative instruments and refinancing-related fees affect the final purchase price calculation. The definitions of cash and debt should clearly specify the treatment of items arising from the benchmark reform.

In a locked-box structure, it is important to determine which party should bear the costs of amendments, conversion or hedge termination incurred between the locked-box date and closing. If such costs are foreseeable and material, it is advisable to address them explicitly in the SPA rather than leave them within the general ordinary-course-of-business provisions.

What Should a Transaction Model Include?

A financial model prepared for an M&A transaction should distinguish between the legacy loan portfolio and new financing. It should also reflect the actual POLSTR conventions, meaning the rules governing how the cost of debt is calculated using overnight money-market rates. The model should demonstrate the expected impact of the reform on the cost of debt, cash, covenants and the valuation of derivative instruments.

Sensitivity analysis should cover, at a minimum, the interest rate path, the refinancing margin, the conversion date and hedging costs. The valuation model must also be reconciled with the purchase price calculation under the SPA. This will prevent the same item from being recognised simultaneously in cash flows, net debt and a separate purchase price adjustment.

POLSTR in business valuation should not be treated as a standalone discount applied to a company’s value. The reform creates specific risks and cash flow effects that must be correctly reflected in the financial model and transaction documentation. The quality of this analysis may have a material impact on the value achieved by both the seller and the buyer.

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