When “Fully Hedged” Offshore Debt Quietly Becomes Expensive AUD Funding
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
Following financial close, offshore debt was converted into domestic currency using long-dated cross-currency swaps.
On paper, FX risk was neutralised and funding certainty achieved.
Over time, however, the synthetic funding cost drifted materially above expectations despite stable asset performance and no credit stress.
The structure remained “fully hedged” –but no longer behaved like domestic funding.
Why This Scenario Is Common
Cross-currency hedges are typically designed at close and then left untouched.
As markets evolve:
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Cross-currency basis widens and remains wide
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Dealer funding spreads embedded in swaps become economically visible
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Reset timing and collateral mechanics drift
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Refinancing and asset-sale optionality become constrained
None of this triggers alarms. The leakage accumulates quietly.
Why It Matters
Carry leakage does not appear as a hedge loss.
It appears as:
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Structurally higher interest expense
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Trapped liquidity supporting derivatives
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Reduced refinancing flexibility
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Weakened asset sale economics
Left unaddressed, it converts cheap offshore funding into persistently expensive domestic debt.
How This Is Typically Addressed (and Why It Fails)
Standard responses focus on:
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Replacing or extending swaps
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Forcing benchmark alignment
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Dealer-led “clean-up” solutions
These approaches often destroy embedded hedge value, worsen liquidity strain, and lock in sub-optimal economics.
The issue is not hedging – it is the design of synthetic funding.
Primary Engagement Route
Primary: Hedge Rebuild™
Secondary / Bespoke: Cross-currency funding decomposition, carry and basis optimisation, collateral and CSA redesign, refinancing-aware hedge restructuring
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.