Infrastructure Financing
Exchange Hedging Mechanism
Airports
Feb 2017
1
According to the draft ordinance published by the Ministry of Transport,
Ports and Civil Aviation on Feb 10 2017, and to assist in the understanding
of the main concepts involved, the Secretariat of the Investment
Partnership Program prepared this presentation, which is intended to
illustrate, with numerical examples, the logic and functioning of the
proposed Exchange Hedge Mechanism for partnership contracts in the
airport sector.
This presentation reflects the current terms of the draft ordinance
submitted to public consultation and serves as a stimulus to encourage the
participation of all stakeholders who may bring contributions and
improvements to the model originally proposed.
2
Mechanism – 3 distinctive concession periods
Activation
Calculation
and
Offsetting
Depletion
3
Mechanism – 3 distinctive concession periods
Activation
Calc. and Offsetting
Depletion
• Optional
• Principal and interest
• Limited amounts set in USD
• Foreign financing
• BRL/USD risk offsetting
• Activation within 7 years
• No guarantees required
• Exchange Rate Variation minus
Benchmark
• Variable Contribution
• Annual offsetting limited from 0
to 10% of Annual Revenue
• Difference transfered to Future
Compensation Balance (SMC)
• Mechanism calculations go until
year 20 (POA until year 15)
• 10 remaining concession years
• Depleats future compensation
Balance (SMC)
• Eventual Credits or Debits at the
end of the concession terms are
cancelled
4
How does the mechanism work?
Optional for the concessionaire, on its foreign debt up to a fixed limit
Variable contribution to FNAC, which is 5% of the Annual Gross Revenues
Compares the Exchange Rate Variation with the Benchmark* Variation:
If Exchange Rate Var. > Benchmark → the amount of the mechanism effect
will reduce the grant payment, up to the limit (zero). The excess is registered
in the “Future Compensation Balance" (SMC) in favour of the concessionaire.
If Exchange Rate Var. < Benchmark → the amount of the mechanism effect
will increase the grant payment, up to the limit of 10%. The excess is
registered in the “Future Compensation Balance " (SMC) in favour of the
grantor.
*Benchmark = IPCA + factor%
5
Practical Example
Debt in USD = $100 MM (initial hedging mechanism amount)
Exchange Rate BRL/USD = 3.2
Initial hedging mechanism amount in BRL = R$ 320MM
5% Coupon, paid annually
12 year maturity, Final Amortization
Limit used – US$ 105MM
Concession beginning – 2017
Calculation and Offsetting
Depletion
2017
2024
2037
2047
Concession
beginning
Time limit
for
activation
End of offsetting
End of
concession
Mechanism
activation
Period T0
Period L
Period M
6
Mechanism Monthly Calculation ( T < L)
Due Balance in USD
SDt = Pt + Jt , where Jt = 0 when interest is not included in the mechanism
MEt = SDt. PTAXt
Benchmarkt = SDt.PTAX0.(1+ IPCAt/IPCA0).(1+f)^(du/252), du – working days
Factor% f = rntnb - rbond (real yield)
Exchange Rate Differentialt = (MEt – Benchmarkt)
Monthly Adjustmentt = Exch. Rate Differentialt – Exch. Rate Differentialt-1
7
Mechanism Annual Offsetting (T < L)
Annual Compensation Amount (VCAt): VCAt = sum of the monthly adjustments (T to T-11),
and, for the first calculation, from T to T0
Hedging Mechanism Balance - Previous (SMC-previot):
SMC-previot = SMCt-1 + VCAt + ACAt
Actual Value of Early Offsettings (ACAt):
ACAt = SCCt - ∑ SCt, where SC = Agreed Contributiont – Effective Contributiont
Future Compensation Balance (SMCt):
SMCt = SMC-previot – SCt
or
SMCt = SMCt-1 + VCAt + ACAt – SCt
Offset Balance (SCt) - (amount to be effectively compensated in the mechanism):
If SMC-previot > 0 → SMC-previot reduces up to the Agreeded Contribution amount.
(0 ≤ Effective Contributiont ≤ Agreeded Contributiont)
If SMC-previot < 0 → SMC-previot increases up to the Agreeded Contribution amount.
(Agreed Contributiont ≤ Effective Contributiont ≤ 2*Agreed Contributiont)
Actual Value of Offset Balance (SCC)
SCCt = SCCt-1 * (1+ π +r) + SCt, where π= (IPCAt / IPCAt-1 – 1), r = real yield NTN-B
8
Hedging Mechanism Depletion (when L< T