Capacity of Portuguese public sector companies to enter into 'snowball' swaps

Capacity of Portuguese public sector companies to enter into 'snowball' swaps

Discussion of therecent case transferred into theFinancial List of Banco Santander Tutto S.A. v Companhia de Carris de Ferro de Lisboa S.A. and others concerning thevalidity of nine derivative transactions entered into between Banco Santander and four Portuguese public transport companies.

Background to theFinancial List

Banco Santander Tutto S.A. v Companhia de Carris de Ferro de Lisboa S.A. and others [2016] EWHC 465 (Comm), [2016] All ER (D) 61 (Mar) was thefirst case to be transferred into theFinancial List and was transferred in with theconsent of both parties only 12 days after theFinancial List came into operation in October 2015.

What were theissues in thecase?

The claimant in thecompany was Banco Santander Totta SA (the bank) and thedefendants were four public sector Portuguese transport companies (the transport companies). Between 2005 and 2007 thebank and thetransport companies entered into nine different long-term interest rate swaps. All of them were under theInternational Swaps and Derivatives Association Inc 1992 Multi-Currency Master Agreement (ISDA Master Agreement) governed by English law and subject to thejurisdiction of thecourts of England and Wales.

The bank paid a floating rate and thetransport companies paid a fixed rate under theswaps but they were not vanilla interest rate swaps. The swaps in question had a 'memory' feature. This meant that once referenced interest rates moved outside upper or lower 'barriers', thefixed rate that was payable by thetransport companies had a spread added to it. Spread means that an additional interest rate is added. The spread was cumulative at each payment date and subject to leverage (in all but one of thenine swaps). Leverage operates as a multiplying factor on thespread in an amount which varies from swap to swap. Therefore, this meant thepayments due by thetransport companies 'snowballed'

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About the author:

Meet Emma:

1.  Banking and finance lawyer with experience in derivatives, debt capital markets, securitisation and structured finance in London and Paris

2.  Likes ballet, playing the harp and holidays

3.  Thinks the law is always changing!

Emma trained and qualified at Allen & Overy LLP and worked in their derivatives and structured finance teams in London and Paris.  She then joined the foreign exchange prime brokerage legal team at Deutsche Bank before spending 4 ½ years with Crédit Agricole CIB advising the fixed income and derivatives desk.