Principles of Project Finance

One answer to this problem is for the Sponsors to take up the long-term inter-

est rate hedging arrangements themselves in advance of Financial Close, and then

transfer the hedging to the Project Company at Financial Close—but they are then

taking on an extra risk if the project, for whatever reason, does not reach Finan-

cial Close. If long-term interest rates go down, there will be a loss in unwinding a

long-term interest rate swap, because the swap provider now has an obligation at

a high long-term rate that cannot be written off elsewhere except at a loss. (Of

course the reverse is true if rates go up. The calculation is also affected by the dif-

ference between short-term and long-term interest rates, as this difference has to

be covered before ...