Project finance deals seem to be so fraught with risk that the uninitiated might suppose the deals are routinely laced with derivatives and backed by multiple hedging programmes. In fact, this is far from the truth. Simon Elliston, head of European energy and infrastructure finance at Citi, explains: “Derivatives are undoubtedly central to a large number of project financings and the ability to put deals in place with the appropriate hedges is very important. But, that said, derivatives hedges are by no means used in all deals.”
Instead, Mr Elliston says, the tension between investors (those initiating the project) and their financiers (the banks) will usually dictate whether derivatives are used to hedge risks. If that sounds a little haphazard, there is a fairly established formula for determining when and where hedges are used.
