London eateryThe Rock Garden has entered what market professionals say is the first weather derivatives contract protecting a restaurant against an inclement spring. Stephen Doherty, director of Speedwell Weather Derivatives--which brokered the transaction--said this is the first deal of its type and signifies the expansion of weather derivatives out of the energy sector. In the deal Enron Nordic Energy sold the restaurant four call options to protect against an excess of cold days between March and June. Officials at Enron declined comment.
The restaurant is compensated if there are a fixed number of days in March during which the temperature is below 8.5 C, said Speedwell's Doherty. While the temperature level that triggers the contract steps up to 11 C in April, 14.5 C in May and 18 C in June, the number of days per month required to trigger the contract remains fixed. The payouts in the latter months are higher because the restaurant's sales typically increase as summer approaches. The restaurant has outdoor and indoor tables.
Doherty said the critical temperature is lower at the beginning of the contract because, "If you get a sunny day in spring the wallets are open." He declined to detail the notional size of the contract, the strike and the premium, but said the contract covers most of The Rock Garden's weather risk.
Below average temperatures on a given day between March and June can cut the restaurant's turnover by half, according to Philip Matthews, managing director of The Rock Garden. He approached Speedwell after reading about a similar transaction the company brokered on behalf of U.K. pub chain Corney & Barrow in May. It has taken until now to carry out the study and decide on the correct contract.
Dan Tomlinson, head of weather products broking at Garban Intercapital in London, said The Rock Garden likely got a favorable price because it has opposing risks to the energy sector. In the U.K., energy companies are winter peaking, meaning they benefit most when temperatures are low as customers use more heating, whereas restaurants want the weather to be hot.
"Managers cannot blame the weather for bad earnings now. They have to do something about it," added Richard Havinger, weather derivatives marketer at Scandic Energy in Malmö. The Rock Garden hedge should increase diversification, he continued, noting that energy companies make up 95% of the market.