Interest rate and FX pre-hedging for a UK offshore windfarm
Case studies

Interest rate and FX pre-hedging for a UK offshore windfarm

  • Our role in the process was to advise on and structure a suitable pre-hedging strategy for this project three months before financial close (FC).
  • The sponsors wished to de-risk the project prior to reaching FC by forward hedging the floating rate of LIBOR for the required commercial bank debt together with the EUR/GDP capex risk required during the construction phase.
  • Financing was provided by a consortium of international banks via a floating rate commercial bank syndicate.
  • FX hedging was required at FC to cover capex construction and equipment costs.
Our Approach

Analyse, price and present various potential strategies in order for the client to understand available approaches in the interest rate and currency market to achieve the required pre-hedge. These strategies included:

  • Collateralised forward starting interest rate swaps and currency forwards
  • Payers interest rate swaption and currency options
  • Deal contingent interest rate swap and deal contingent FX forwards
  • Deal contingent hedges (DCH) were agreed to be the preferred strategy
  • Introduce non lending banks to compete for the deal contingent trades
  • Run competition process to ensure best value from the potential DCH providers
  • A relevant execution protocol was negotiated with the chosen DCH provider and a series of dry run pricing exercises were undertaken to establish a history of benchmark pricing
  • Client understood the available hedging strategies and could analyse what was available and at what price.
  • Introduction of hedge providing banks known to have appetite for this type of hedge.
  • Review of documentation and analysis of banks’ pricing ensured value add and cost saving.
  • Initial execution and unwind of DCH (at FC) in an orderly manner to limit market disruption and maintain pre-agreed trading spreads.
  • A detailed history of all benchmark pricing conducted in the lead up to trading was recorded to ensure that hedge party maintained their agreed execution levels over mid at time of trade.
  • Post trade, we provided the client with a written confirmation outlining the hedging strategy undertaken and the various pricing that was agreed. This documentation, together with relevant screen prints, provided a valuable audit trail for the client’s records.

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