Refinancing Project Debt Without Destroying Hedge Value
Sector: Project Finance – Operating Assets
Asset Class: Transport / Utilities / Regulated Infrastructure
Situation Type: Refinancing long-dated operating-phase project debt with legacy interest-rate derivatives in place
Primary Issue: Embedded derivative value leakage and execution risk caused by poor refinancing sequencing and derivative ownership misalignment
The Situation
Mature operating assets enter refinancing from a position of strength.
Construction risk has cleared, cashflows are stable, and market conditions support lower margins and longer tenors.
Legacy interest-rate swaps were executed years earlier under very different rate and funding regimes.
On paper, refinancing improves equity value and reduces risk.
In practice, derivatives become the weakest link in the transaction.
Why This Scenario Is Common
Refinancing processes are typically debt-led and time-constrained.
Derivatives are treated as ancillary to lender selection rather than as core value drivers.
Legacy swaps often remain with incumbent banks, while new lenders push for “clean” structures that ignore embedded hedge economics.
As timelines tighten, sequencing mistakes become irreversible.
Why It Matters
This is not a pricing problem and not a market failure.
Poor sequencing transfers value from the asset owner to counterparties through:
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Forced termination at unfavourable points in the cycle
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Liquidity gaps during settlement and close-out
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Surrender of embedded hedge optionality
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Accounting and IC pressure that weakens negotiation leverage
Refinancing economics deteriorate without any change in asset performance.
How This Is Typically Addressed
Most refinancings default to blunt solutions:
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Terminate legacy swaps to “simplify” the structure
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Accept close-out economics as execution friction
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Defer derivative decisions until late in the process
These approaches prioritise transaction speed over value preservation and routinely destroy embedded hedge value.
Primary Engagement Route
Primary Offer: Capital Drag Audit™ – Refinancing-linked derivative transition, novation strategy, and execution sequencing
Read the IC Brief → (2-page decision summary)
Full structural narrative shared selectively on request.
Illustrative scenario for discussion purposes only. Not a transaction summary or client-specific case study.