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Hedging advice for a Canadian Infrastructure Sponsor
Case studies

Hedging advice for a Canadian Infrastructure Sponsor

Background
  • JCRA was mandated to provide hedging advisory services for the financing of a 100mW natural gas powered cogeneration facility.
  • The initial financing consisted of a $600m CAD floating rate bank facility to be hedged for 35 years.
  • The sponsor’s long term plan was to refinance in eight years’ time by way of an amortizing Canadian fixed rate project finance bond issue.
Our Approach
  • Given the relative illiquidity in the long end of the Canadian swap market, JCRA surveyed/negotiated with the bank group to determine who would act as sole swap execution provider and syndication agent.
  • JCRA conducted ongoing sensitivity analysis related to the eventual bond market take-out of the bank facility , especially as it related to slippage between corporate bond spreads and swap spreads.
  • Upon awarding execution/syndication mandate, conducted dry runs and monitored all pricing at time of execution.
Benefits
  • The sponsor was able to secure financing once achieving comfort that the bond take-out would be cost effective under various stressed scenarios.
  • Though executing in the most illiquid part of the curve, JCRA ensured that 1) the mid/offer spread was “inside” quoted markets and 2) the entire transaction would be executed in one tranche, eliminating any risk that its large size would move the market.
  • Despite LCH not “clearing” Canadian swaps with terms greater than 31 years, JCRA worked with the selected swaps execution provider to design an innovative solution to avoid potential bilateral CSA charges.
 

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