Deal of the year, Asia: Deutsche Bank

Energy Risk Asia Awards 2019: Size, complexity and pioneering nature of deal-contingent interest rate swap showcases bank's capabilities

Ashok Das, Deutsche Bank

Taiwan has an ambitious agenda to rebalance its energy mix, increasing the use of renewables. The government has pledged that 20% of the country’s electricity will be generated from renewables by 2025, a target that will require the installation of approximately 27 gigawatts of new renewable electricity capacity.

As a result, Taiwan has become the focus of green developers and investors from around the world. Germany-based WPD was one of the first to arrive with the ambition to develop the largest ever offshore windfarm in Taiwan. As it lined up banks to raise some $2.5 billion in long-term financing, it became concerned about interest rates, which were looking volatile. Therefore, the firm wanted to lock in its Taiwanese dollar interest rate exposure while it finalised the rest of the financing terms.

Deutsche Bank, who was the underwriter, bookrunner and mandated lead arranger for the wind farm financing, structured a deal contingent (DC) interest rate swap (IRS) that ultimately enabled successful closing of the project. Under the deal, the firm was able to fix the interest rate on its project financing for 10 years. This enabled it to lock in project cashflows and also helped to finalise the equity divestment and project financing terms with lenders.

Moreover, because it was deal contingent, WPD was not committed to the hedge if the project did not materialise. At over $1.6 billion in notional, the DC IRS was one of the largest such hedge solutions offered by any bank globally, and the first to be linked to green project financing for Taiwan and the Asia-Pacific region, according to Deutsche Bank.

“This was a milestone trade that set a new benchmark in scale and complexity,” says Ashok Das, head of Asia local markets trading and solutions at Deutsche Bank in Singapore. “It shows future sponsors that it is possible to execute such a deal of this size and tenor in nascent onshore markets like Taiwan.”

The deal threw up many challenges as it required the ability to underwrite a large DC exposure within a very short time frame in an evolving industry and to do so in a highly confidential manner. Deal execution and risk syndication needed to be managed expeditiously, to avoid any severe market impact. Execution and risk syndication took place within four to six weeks of the deal being mandated, a time that included periods of illiquidity during holidays.  

Several other banks were considered for the IRS mandate, but Deutsche Bank believes it was selected because its solution met all the client’s objectives. “There were probably over 10 banks pitching, and ultimately the reason the client chose us was because we offered a complete solution that met all its needs,” says Rahul Jain, director, Asia local markets. “It not only provided an exact hedge for its interest rate risk, but also protected them against the risk of the financial close not happening.” 

The DC component of the trade meant Deutsche Bank had to have a high level of conviction that the underlying trade would happen. To evaluate this, the Asia local markets trading team needed to assess not just market and credit risks, but also regulatory, legal, policy, political and project-execution risks. It required full due diligence across all aspects of the underlying project, including a fundamental credit analysis to determine whether the project would be financed by the lenders and achieve financial close within the DC time frame.

The risk the bank took on from the hedge itself was also significant. It was for a large notional amount, for a long tenor and needed to be executed in a market that was illiquid along the curve. It was also linked to a project financing that involved a large number of institutions and the time frame was short.

Managing the risk of the hedge called for team cooperation within Taiwan, across Asia and at global hubs. It required a deep understanding of the investor base in order to find pockets of liquidity into which the underlying risk could be distributed and to ensure that specific risk components were placed with the relevant investors. These investors included hedge funds active in offshore Taiwan curves, real-money investors looking at long-tenor exposures, and the interbank market. Deutsche Bank successfully syndicated the risk over a period of three to four weeks without causing any price volatility, it says.

The wind farm project reached financial close on May 30 this year, and final completion is scheduled in December 2021.