$66.9M hedg­ing loss was nor­mal, pru­dent: Nal­cor

The Aurora (Labrador City) - - NEWS - BY JAMES MCLEOD

Nal­cor CEO Stan Mar­shall says there’s noth­ing scan­dalous about a hedg­ing in­vest­ment made by the com­pany ear­lier this year, which led to a $66.9-mil­lion loss.

Blog­ger Des Sul­li­van pub­lished the news first on his “Un­cle Gnarley” blog, with his char­ac­ter­is­tic jaun­diced eye for Nal­cor.

“The $66.9-mil­lion cost to the prov­ince is 3.68 per cent of the amount hedged or 2.31 per cent of the to­tal ad­di­tional amount bor­rowed un­der the Fed­eral Loan Guar­an­tee,” Sul­li­van wrote.

“$66.9 mil­lion. Gone. Lost. In just six days!”

But Mar­shall said Sul­li­van was of­fer­ing a torqued per­spec­tive of a pru­dent busi­ness move.

At is­sue is the ad­di­tional fi­nanc­ing cov­ered by the sec­ond fed­eral loan guar­an­tee, to­talling $2.9 bil­lion, which will help cover the huge cost over­runs for the Muskrat Falls project.

There was a six-day win­dow be­tween when Nal­cor had all the pa­per­work done and when it would ac­tu­ally go to the mar­ket to bor­row the money.

So, Nal­cor locked in roughly $1.8 bil­lion at cur­rent in­ter­est rates as a hedge against any fluc­tu­a­tions over the six-day pe­riod.

Mar­shall ex­plained this as like if you were buy­ing a house and you had a one-month clos­ing pe­riod; the bank might give you the choice to lock in your mort­gage in­ter­est rates, or wait and take the in­ter­est rate a month later when you ac­tu­ally get the house.

To re­duce risk, you might lock in half the mort­gage at cur­rent in­ter­est rates, and then let the other half float for a month un­til the sale closes.

That’s ba­si­cally what Nal­cor did, just with bil­lions of dol­lars over a much shorter pe­riod.

It ex­pected in­ter­est rates might rise a lit­tle bit over those six days be­cause the fed­eral gov­ern­ment was go­ing to the mar­ket for a bond is­sue of its own, and in­ter­est rates some­times creep up­wards a bit be­fore then. In­stead, in­ter­est rates went down, so it would’ve been cheaper to wait and bor­row the whole amount of money six days later, rather than lock­ing in at the higher in­ter­est rate.

The re­sult, ef­fec­tively, is a $66.9-mil­lion loss for Nal­cor. Mar­shall said that cost would be amor­tized over the full length of the bor­row­ing.

Mar­shall said this kind of hedg­ing is com­mon — Nal­cor does it in the oil busi­ness, and it did the same thing back when the Muskrat Falls project was first sanc­tioned, and they bor­rowed the first round of fi­nanc­ing.

“There’s a le­git­i­mate func­tion of hedg­ing. A lot of busi­nesses do it, for the right rea­sons,” he said.

In the Un­cle Gnarly blog post, Sul­li­van was much less for­giv­ing.

“Nev­er­the­less, like most things touched by Nal­cor, the scheme failed,” he said.

FILE PHOTO

Nal­cor CEO Stan Mar­shall

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