It was the largest swap trade of its kind in Asia; it was assembled, executed, hedged in a tight timeframe and in a market where liquidity is notoriously patchy.
“This was an unprecedented and unmatched transaction, and we are one of the few banks that could undertake something like this,” says Ashok Das, head of Asia local markets trading and solutions at Deutsche Bank in Singapore.
It was a complex deal-contingent interest rate swap with a more than ten years’ tenor and with a notional in excess of $1.6 billion for Germany-based corporate WPD. The deal was linked to financing on an offshore windfarm in Taiwanese waters.
For the client, it meant it could lock Taiwan dollar interest rate cost at a competitive level, but the swap would only become effective once the project financing was confirmed.
For Deutsche Bank, the project was far from straightforward to underwrite. It effectively meant assessing and pricing the probability of the deal reaching financial close, execute the trade and syndicate the risk at very illiquid tenors – and all in the space of two short weeks.
The first task for Deutsche Bank was to evaluate the certainty of WPD’s syndicated financing deal going through, which involved assessing a host of factors such as regulatory, legal, cross-border, antitrust risks and underlying sale-purchase agreements.
There is an added complexity to such an assessment on a project financing deal, compared with the equivalent analysis carried out on a typical deal-contingent swap for an M&A transaction, says Das.
The financial close of the transaction was not dependent upon a bilateral agreement being reached, but one involving 16 lenders. Deutsche Bank therefore had to underwrite not only market and credit risk, but also the condition precedents of the deal – events that must occur for the contract to become due – at a time when much of the documentation was still to be finalised, he says.
“We had to think about how we could price from a risk perspective, from a credit risk perspective so we are comfortable in terms of providing the solution to the client,” says Cynthia Chan, chief country officer and head of corporate & investment bank, Taiwan, at Deutsche Bank in Taipei.
We had to think about how we could price from a risk perspective, from a credit risk perspective so we are comfortable in terms of providing the solution to the clientCynthia Chan, Deutsche Bank
According to Das, that required diligence across all aspects of the underlying project, including a fundamental credit analysis to determine if the project could be financed by the lenders and achieve financial close within the deal-contingent timeframe.
That task was facilitated by the bank’s valuations adjustment desk, which – unlike many bank XVA desks – employs a team of fundamental analysts.
“A significant amount of work was done to analyse whether the project would meet the conditions precedent and achieve financial close. The analysis needed to be done with relatively limited information because we were analysing these risks at a time when the full deck that would normally be given to the lenders was not fully available,” says Kerem Kozan, head of Apac XVA trading at Deutsche Bank in Singapore. “We had to understand how lenders would fundamentally view the project. Having a fundamental analysis capability, which is not common on XVA desks, set us apart and allowed us to do this.”
A second area of complexity was managing the market risk. To hedge the deal-contingent element of the trade, Deutsche Bank used various options strategies in the Taiwan dollar and US dollar rates markets.
Part of the risk was syndicated to Taiwanese life insurers through structured investment products. Taiwanese local banks create long-tenor structured investment products for real money investors such as lifers and pension funds. These types of structures carry an embedded derivative risk, which the local banks must hedge. Deutsche Bank‘s flow rates and options desks in Taiwan onshore market and in Singapore worked together to package hedging solutions for these issuers that offset the deal-contingent interest rate swap risk that the bank was warehousing.
The transaction would have been all but impossible, Das says, were it not for the close partnership across Deutsche Bank’s various locations and divisions, from options trading to counterparty portfolio management, transaction banking and global credit trading teams.
“In order to provide the risk solution to the client and manage the risk we leveraged on our global client franchise as well as multiple risk instruments available across markets, thus creating a unique solution for our client,” adds Das.
“What we have done is an incredible job from a solutions perspective – managing to get this solution to the client when it needed it, in a situation that was quite volatile and in a tight timeframe; for a nascent industry like wind farms in Taiwan.”