Our client, a fund that had a majority stake in a highway concessionaire, realized that the project finance had two types of swaps, one for inflation and another for interest rates. The fund saw an opportunity to realize several tens of millions of euros from the investment.

Our client, after performing certain calculations, realized that the inflation swap was gaining more than 70 million euros, while the interest rate swaps were losing a slightly higher amount.

Their idea was to cancel the inflation swap, leaving the interest rate swaps uncanceled. Indeed, canceling that swap would allow a very significant amount of money to be received in cash. But that did not mean it was a positive thing for the concessionaire.

Derivatives must be valued at market value. Realizing that derivative value did not imply that the concessionaire would enter into profits. The reason is that realizing the profit from the inflation swap did not imply that the loss from the interest rate derivative would cease to exist. Therefore, from the point of view of profit generation, the proposed operation was neutral.

But furthermore, the cancellation of a swap involves cancellation costs that include the cost of bank commissions and notary fees. These costs, logically, do impact the income statement. Therefore, the proposed operation implied worse results than leaving the inflation swap uncanceled.

Finally, we convinced the client that the structure previously designed was perfect from the point of view of risk coverage. The reason is that the inflation swap covered situations in which tolls had not risen at all, since inflation had gone through periods of value 0 and negative. The interest rate swap did the same with interest rates, fixing them at a fixed amount invariable to interest rate movements.

In other words, the concessionaire had fixed profits independent of movements in inflation or interest rates. Consequently, the concessionaire enjoyed the ideal risk situation in a business, since it was immutable to what happened in macroeconomic variables and only depended on the cars that circulated on the highway.