When protection behaves like leverage
Sector: Project Finance – Operating Assets
Asset Class: Infrastructure / Energy / Transport
Situation Type: Operating-phase offshore debt synthetically converted to domestic currency
Primary Issue: Persistent carry and basis leakage embedded in long-dated cross-currency hedges, inflating funding costs without visible FX risk
The Situation
Commodity price risk was hedged conventionally at close using linear swaps and standard CSAs.
The assets are operating. Cashflows are stable. Credit performance is intact.
Despite this, liquidity tightens episodically and persistently as margin calls consume cash buffers – even when operating performance remains strong.
The hedge works economically. It fails structurally.
Why This Scenario Is Common
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Commodity hedges are designed to stabilise revenues, not liquidity
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CSAs are negotiated under historical volatility assumptions
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Collateral is treated as a technical detail, not a binding constraint
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Stress testing focuses on price, not margin behaviour
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Governance assumes performance will relieve pressure – it does not
This failure mode is embedded at close and surfaces only under stress.
Why It Matters
When collateral mechanics dominate:
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Liquidity, not economics, becomes the binding constraint
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DSCR resilience weakens despite stable EBITDA
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Refinancing and asset-sale optionality collapse
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IC confidence erodes as “protective” hedges drain cash
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Decision-making shifts from strategy to survival
This is capital drag, not market loss.
How This Is Typically Addressed (Incorrectly)
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Blunt hedge unwinds that crystallise embedded losses
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Emergency liquidity injections to support margin
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Reframing the issue as a pricing or forecasting error
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Treating margin as temporary noise rather than structural behaviour
These responses destroy value and reduce control.
Primary Engagement Route
Primary: Capital Efficiency Rebuild™ – Commodity hedgeand collateral redesign to stabilise liquidity behaviour while preserving embedded hedge value.
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.