Derivatives house of the year: Macquarie

Energy Risk Awards 2022: Bank's risk management expertise bolsters clients in challenging conditions

Benjamin Davis, Macquarie

Over the past 18 months, volatile markets, pandemic-induced changes in consumer behaviour and growing corporate interest in environmental issues have presented challenges and opportunities for energy market participants.

During this time, Macquarie, winner of Energy Risk’s 2022 Derivatives house of the year award, used its wide presence across both physical and financial commodity markets to steer its clients through some of the most challenging market conditions they have ever encountered.

In 2021, in line with its enduring focus on environmental issues, Macquarie worked with a longstanding client to execute an acquisition hedge for an ethanol production plant. “This client approached us because it wanted to expand its business into renewable fuels with the purchase of a standalone ethanol plant,” says Dave Duggal, Macquarie’s head of North American oil origination.

“The client needed credit and it needed to hedge its input – corn in this case.” In addition to providing both, Macquarie also alerted the client to a key risk in relation to an operating expense – natural gas, which is used to power the plant, says Duggal. “Gas prices have been creeping up on many of our clients. When we started our due diligence, it accounted for around 40% of this client’s operational expense, but it had risen to 60% by the time they were close to completing the deal.”

Macquarie was able to quickly gain an understanding of the risks involved and approve the necessary transactions to execute the acquisition hedge, according to Duggal. And by identifying the natural gas supply risk and including it in the deal process, the firm was able to mitigate this risk and enhance its credit position. In addition to incorporating this operational expense hedge, Macquarie also supplied natural gas as part of the deal. “This provided an economical and complete solution,” Duggal says. “Our ability to package physical and financial solutions, given our physical footprint, differentiates Macquarie from its competitors.”

Dave Duggal, Macquarie

Macquarie’s commodity markets and finance (CMF) client coverage teams work across 12 offices in Europe, the Americas, Australia and Asia, covering sectors including crude oil and refined products, natural gas, power, metals and renewables. These teams provide risk-management products to more than 500 corporate clients. Much of the staff continued to work from home in 2021, due to pandemic-era restrictions and new working practices. The firm’s infrastructure, support teams and systems enabled it to continue providing clients with hedging support and derivatives structures, as well as helping them manage a particularly volatile period across the commodities complex.

Macquarie has continued to support the airline industry over the last year with derivatives solutions designed to mitigate the impact of recent extreme market shifts. The industry has been impacted by supply and price volatility since the start of the pandemic. The bank has provided derivatives structures designed to cap potential losses without any requirement for upfront payment.

“This extra effort ultimately enabled these consumers to take full advantage of some of the lowest jet prices in more than a decade and supported the industry in deploying its services economically as travel demand returned,” says Benjamin Davis, head of Macquarie’s Europe, the Middle East and Africa (EMEA) oil sales team.

As a result, Macquarie was able to continue to support these clients, growing its EMEA client portfolio in the process from around 125 clients a year and a half ago to close to 150 at present.

“Macquarie stepped in and built its own framework to manage these new risks,” Davis says. “And we’ve continued to onboard new clients while the bank has been focused on supporting clients navigating the volatility in markets. We are a client-focused business and it is important we are there to support our clients when they need us the most.”