Hedging advice for the Rijkswaterstaat A16 road project

Background

• A EUR1B project to strengthen an embankment, build new lock gates, and install new drainage pumps along an iconic 32km causeway which connects North Holland to Friesland.
• The project had three bidding consortia submitting best and final offer (BAFO) funding solutions. Each consortia’s BAFO financial model involved debt, either on an institutional or commercial bank basis, plus lending from the European Investment Bank (EIB).
• Our objective in this project was to ensure bidding consortia priced their respective hedging inputs consistently and correctly.
• Chatham’s role at the pre-preferred bidder stage was to ensure each bidder was pricing its inputs and debt structure correctly whilst also assessing other aspects of the proposed funding solution.
• Four international banks provided the total debt with only three of these four providers swapping the floating-rate debt for fixed rates at financial close.

Our Approach

• Once we had established the relevant debt profile, Chatham worked with the individual consortia lenders to ensure the basis for the pricing was ‘at market’ on a pre-defined static yield curve, thereby enabling each submission to be compared on a like-for-like basis.
• Market pricing, execution spreads, credit, and undisclosed margins were also ascertained.
• The consortia were asked to agree in principal the execution protocol to be used at financial close, plus proposed hedge execution strategies, and costs to be used should their submission be successful.

Benefits

• Chatham ensured that no errors were made in any of the bid submissions’ hedge pricing.
• By benchmarking each of the bidder’s financing solutions at the pre-preferred bidder stage, Chatham was able to negotiate competitive pricing for the execution and credit spreads applicable to the swap(s) well in advance of financial close and whilst there was still competition to be mandated for the concession.
• Chatham coordinated the execution process at financial close (FC). Prior to FC, Chatham, along with the relevant public authority and winning consortia banks, conducted a series of dry-run exercises to provide transparency to the parties involved, and ensured that pre-agreed pricing was maintained.