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 6 days!”
But Marshall said that 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 Gnarley blog post, Sullivan was much less forgiving.
“Nevertheless, like most things touched by Nalcor, the scheme failed,” he said.