Case Solution & Analysis for Metro do Porto: An Interest Rate Swap by S. Veena Iyer, Anshul Jain.
Complete Case details are given below :
Case Name : Metro do Porto: An Interest Rate Swap
Authors : S. Veena Iyer, Anshul Jain
Source : Ivey Publishing
Case ID : 9B16N011 / W16261
Discipline : Finance
Case Length : 07 pages
Plagiarism : NO (100% Original work)
Description for case is given below :
In January 2007, Metro do Porto, a light rail network, entered into an interest rate swap agreement with Banco Santander Totta on a notional principal of €89 million. The intent was to reduce the interest costs that Metro do Porto was incurring. This was a complex swap agreement that brought immediate benefits to Metro do Porto but proved catastrophic in the long run. Two years after the swap commenced, a “snowball clause” in the swap agreement took effect, increasing Metro do Porto’s liability beyond 60 per cent per annum at a time when market interest rates were low and expected to drop even lower. It was unclear whether the company entered into this agreement out of ignorance, political pressure, or both, but the end result was a lawsuit. Students are expected to analyze the terms of this swap and decide whether the swap constituted good practice from a risk management perspective and whether Metro do Porto should have been able to anticipate the possible losses.
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