To the extent floating base interest rate financing solutions are implemented, Respondents are required to provide interest rate swaps that offer a fixed interest rate for the tenure of the committed debt finance (i.e. an interest rate hedge until the first Refinancing).
Respondents must set out details of their proposed hedging arrangements, including:
• quoting the Base Case Interest Rate for the Floating Rate Component in their Financial Close Financial Model as a single notional forward starting swap rate priced off mid-market interest rates and including a 5 basis point BBSY adjustment, using market interest rates at 10:15am one week prior to the Closing Time and Date;
• on top of the Base Case Interest Rate, Respondents are to add a risk margin of [15 basis points (comprised of approximately 4 basis points in execution costs and 11 basis points in credit/liquidity fees)], to reflect the estimated cost to the State of managing interest rate exposure beyond the hedged period. The Base Case Interest Rate and the additional risk margin should be clearly and separately identified in the Financial Model and the Financial Proformas;
• Respondents must include the data source and any other assumptions used in deriving the Base Case Interest Rate. The Base Case Interest Rate on the Floating Rate Component will be quoted by Treasury Corporation of Victoria on the day of Financial Close;
• the manner in which Respondents will address the risk of future movements in interest rates and inflation, including a full description of their interest rate hedging strategy, and the time period over which hedges are expected to be in place;
• details of any financial instruments which will be used to provide protection against interest rate or inflation movements and the cost of such protection;
• in relation to interest rates, the assumptions and data sources regarding the data points on the swap curve from which hedging arrangements have been priced (or assumptions and data sources relating to other financial instruments to be used for hedging and/or setting base interest rate risk at Financial Close);
• all fees, charges, execution margins and adjustments associated with the hedge; and
• the identity of the potential hedge counterparties, if available.
Should Respondents consider any alternative base interest rate risk allocation or hedging strategies that would deliver greater value for money benefits to the State, such proposals should be provided as Value for Money Enhancements in accordance with Proposal Requirement E3.1 (Value for Money Enhancements).