lender that there could be a mismatch between the rate in the loan agreement and the associated interest rate swap , but at least the timing and the triggers are aligned .
The project finance market differs in its approach to this issue compared with other forms of structured finance due to the prevalence of public agency lenders , such as ECAs , multilateral agencies and DFIs . While some ECAs can provide direct loans , they have not , to-date , been able to provide interest rate hedging solutions other than the CIRRs offered by some of the ECAs . This is not the case for multilateral agencies and DFIs , which regularly provide interest rate swaps alongside their loans .
These institutions have traditionally taken a conservative position in relation to risk allocation and as such we do not expect that they will be willing to accept any link in their interest rate swaps to the floating rate in their corresponding loan agreements . The rationale for this is that , unlike a major international bank that has greater ability to manage its hedging portfolio , a multilateral agency or DFI may be tied to the terms of whatever back-to-back hedging arrangements it entered into at the time it executed its Libor interest rate swap .
The project finance market also differs in its approach to other forms of structured finance in another key respect , and this is due to the close-knit relationships that are formed between project sponsors and project financiers , who have
often worked together on multiple projects over many years , and the , relatively , small number of participants who can act as both a lender and a hedge provider .
The practical reality of this dynamic means that for a hedge provider to do anything other than act in a constructive and co-operative manner following a Screen Rate Replacement Event under the loan would not only cause major relationship issues , but would also be against that financial institutions ’ interests in its capacity as a lender .
In addition , many participants in the project finance market take the view that , in the case of US dollar financings , which is usually the currency of choice for project financings in emerging or developing markets , the forward market for SOFR will be sufficiently liquid by 2021 so that its adoption will be a mechanical , rather than commercial , exercise .
In the meantime , participants in the project finance market will continue to work towards ensuring : ( 1 ) a clear understanding of the trigger events in the loan and hedging documentation ( 2 ) a transparent approach to the determination of the replacement benchmark rate – ideally with clearly defined fallback mechanisms in the documentation ( 3 ) a transparent approach to the determination of any adjustment spread , with a clearly defined methodology and ( 4 ) the further alignment of the loan and hedging market in its consideration of this issue . •
Reach the people who matter
Advertising and sponsorship opportunities in PFI
The most senior professionals in the world ’ s capital markets rely on PFI for authoritative and independent news , data and analysis – and have done for more than 25 years .
PFI provides an unrivalled opportunity for advertisers to reach the people who drive and shape the industry and gives them the chance to associate their company with the world ’ s number one source of global capital markets intelligence .
For more information on the various advertising and sponsorship opportunities available within PFI , contact :
Leonie Welss : + 44 ( 0 ) 20 7542 7752 , Sahid Hamid : + ( 65 ) 9755 5031
64 Project Finance International September 23 2020