A clever hedge gave Intesa Sanpaolo the edge

The Italian bank has outpaced competitors in the US LNG project-finance market with an innovative product, writes Sophy Buckley

Sophy Buckley


A simple misunderstanding can sometimes speak volumes. “Just four years ago, it was rather frequent when meeting project finance people in the United States to be confused for a Brazilian bank,” says Alessandro Vitale, head of the Structured Finance Americas (SFA) desk at Intesa Sanpaolo.

“Today we don’t have to explain. They know where we’re from; they know we’re Italian.”

The new-found celebrity comes as the result of a series of large project-finance deal transactions where the bank worked alongside top tier international banks. These were big deals in project finance and big deals in terms of innovation. It has not only changed the way that such arrangements can be constructed, but also put Italy’s strongest bank by capitalisation on the New York map.


“It took us from zero to hero,” Vitale says. “We hadn’t operated a structured finance desk in the US for years, and when it was reopened at the end of 2010, we were involved in medium-sized project-finance deals with mid-tier roles, investing perhaps between $40m and $75m. It was just myself and my colleague Nick Matacchieri at the time and it was quite hard.”


It’s dramatically different now. “Today, we are typically involved with top tier roles – Joint Lead Arrangers – investing considerable amounts of money, often in multibillion international structure finance transactions. But what has really been important is that we were able to leverage on the great professionals we have within our bank and combine their expertise in such a way to offer very innovative solutions to clients in what is probably the world’s most innovative market – and now others are following our lead, offering it, too,” he says.

The secret of our success lies in the strong team spirit. As I always say to my colleagues, there is no ‘I’ here, just ‘We’.

The opportunity arose from changing circumstances that Intesa Sanpaolo was clever to spot – and was able to act on fast. The bank’s London office had long been working on financing transactions in the gas-rich state of Qatar, and had picked up specialist knowledge and understanding of the liquefied natural gas (LNG) sector.


In the US, on the other hand, the LNG sector – built up during the mid-2000s – was geared around imports. But as the country’s shale-gas boom took off, moving it towards energy independence, import facilities were left redundant. Clearly export plants were required instead. While the pipeline infrastructure was fine, many of the existing assets needed to be converted and expanded to handle the opposite flow.


The bank realised that many of the players in the US industry were also changing. Entrepreneurs were entering the market, as were funds, with very different business models from the traditional LNG suppliers- that had previously dominated.

These new players – Cheniere Energy and Freeport LNG to name a few – completion for traditional LNG suppliers needed to find ways to reduce risk, particularly in the period between deciding to invest on a project and securing bank
financing for the same.

“Mitigating interest rate risk is very valuable to these types of clients,” says Vitale. “They are always happy to pay for it.”


He explains that in M&A transactions, private equity normally hedges the volatility of interest rates before closing to minimise risk. This is often done using a product  known as a  deal contingent hedge or DCH, which provides the client with the possibility in effect to lock in interest rates ahead of the financial close.


The particular attraction of the DCH is that the client keeps the option to break the hedge with no repercussions in the event that some predetermined conditions mutually agreed upon do not materialise.


Intesa Sanpaolo, drawing on its remarkable SFA knowledge in the LNG sector and the strong interest rate hedging expertise of the Banca IMI Corporate Risk Solutions desk, decided to offer this product, innovative for project finance, to its LNG clients.


The first DCH was structured in August 2014. The mechanism was phenomenally successful, saving the client several millions of dollars in cost of debt and substantially improving equity returns. The bank has since been able to use it two more times – on two further LNG projects. “We can do it because we understand the specificity of this market, we know where the risks we are hedging are and are able to accurately quantify them. My colleague Nick, with his notable oil and gas knowledge, is a true asset of the bank in this regard. The same has to be said for our American and Italian colleagues of Banca IMI with whom we re-engineered this specific product for project finance usage”.


This is critical. “We do not hedge unacceptable risks,” Matacchieri adds. “We must know we can manage it. We only offer a DCH after doing deep due diligence. We have to be 95 per cent confident the deal will go ahead. The DCH locks in an interest rate for the client and that is very valuable to them.”


Vitale is rightly proud of the bank’s achievement. Not only has it established Intesa Sanpaolo as a top-ranking player in the LNG space, but the deals have also opened up innovative and lucrative cross-selling opportunities for the bank. “We’ve been able to introduce work to our capital markets teams, swaps, securities – there was even involvement in an initial public offering (“IPO”) as a result,” he says.


The bank is now looking to expand its structured finance work further in the Americas, possibly by adding a leverage and acquisition platform to the consolidated project finance franchise.

“We are currently working on opportunities in Canada, Mexico, Costa Rica, Colombia, Peru, Brazil, Uruguay and Chile."

“As to the DHC, we have first mover advantage,” Vitale says. “Intesa introduced this product in US and can replicate it elsewhere depending on circumstances.” But that’s not all. The move showed that the bank can solve problems and be truly innovative.


“We are adamant about adding value,” he says. “We always ask what worries clients. When we understand that, we can find and develop products to address their worry. When you do this you really offer a great service – you create value for the client. We listened and we innovated. That’s why it worked.”

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