Derivative financial instruments at fair value


Derivative financial instruments at fair value

Set out below is an analysis of derivative financial instruments and their fair values and notional maturities at 31 December 2007. Hedge derivatives are presented separately from ineffective derivatives, providing additional details regarding the hedge type, risk hedged and instrument type:

 Derivative financial instruments

  1. Description of the main hedging transactions

    Set out below is a description of the derivative financial instruments contracted by the Group. The majority of derivatives contracted by Grupo Ferrovial have a AA credit rating.

    BAA derivatives

    • The BAA Group held derivatives to hedge interest rate risk, consisting of interest rate swaps with a notional value of 5,428 million sterling pounds (7,381 million euro) maturing between 2008 and 2035. Of this total, a notional amount of 1,495 million sterling pounds (2,033 million euro) is not deemed to qualify for hedge accounting, despite being an economic hedge against interest rate risk. An additional derivative with a notional value of 350 million sterling pounds is not expected to qualify for hedge accounting in 2008.

    • BAA also contracted cross currency swaps with a total notional value of 1,703 million sterling pounds (2,316 million euro), maturing between 2012 and 2018, to hedge sterling/euro foreign exchange risk in respect of bonds issued in euro.

    • Additionally, BAA contracted derivatives to hedge inflation risk (index linked interest rate swaps) in future debt issues, for a notional value of 1 billion sterling pounds. To date, these derivatives have qualified for hedge accounting but are not expected to qualify in 2008.

    • Finally, BAA has concluded a contract that allows it to establish the future purchase price of electricity subject to a minimum purchase volume. This contract is treated as an embedded derivative and it is carried at fair value. BAA also has equity swaps related to Ferrovial's share-based compensation systems addressed in Note 34.

    Toll road derivatives

    The main derivatives are described below:

    • Chicago Skyway has hedged its entire debt with equity swaps. Series A bonds totalling 301 million euro (439 million American dollars) are hedged for a notional sum equal to 100% of their value that ensures a rate of 4.82% for the first nine years of the bond's term and at 5.88% for the final three years. Series B bonds are fully hedged for a notional sum of 659 million euro ( 961 million American dollars) by means of equity swaps establishing a schedule of certain flows receivable in exchange for variable-interest payments that increase over time, for an effective rate of 5.66% (including the bond margin). Finally, the company has contracted hedges for all Series C debt, for an initial notional sum of 103 million euro (150 million American dollars, establishing a fixed rate of 4.68%.

    • Indiana Toll Road has contracted interest rate swaps for its entire debt of 2,907 million euro (USD 4,239 million), establishing an effective interest rate of 5.82%.

    • Inversora Autopista del Sur has hedged the interest rates on 99.47% of its debt, consisting of Tranche A and Tranche BEI (maximum notional value of 456 million euro) at a rate of 3.83 % and Tranche B (100 million euro) at a rate of 4.18%.

    • Autopista Santiago Talca has contracted cross currency swaps to hedge all financing payments involving US dollars and Chilean UF (inflation-indexed development unit), for a notional value of 289 million euro.

    • At 31 December 2007, the company 407 ETR International Inc, which operates in the infrastructures segment, recognises an issue of 110 million euro in SIPS (Synthetic Inflation Protected Securities), which carry a coupon indexed to the Canadian inflation rate.  For accounting purposes, this issue is classed as an ineffective derivative and is measured at fair value. However, as it is a financing tool from a financial viewpoint, the relevant amount has been reclassified in the balance sheet at December 2007 as an increase in the value of debt.

    Finally, under derivative financial instruments are also included equity swap contracts concluded by the Group exclusively to hedge the impact on equity of its stock option plans, as described in Note 3.5 about market risks. These contracts are considered ineffective derivatives and the resulting gain or loss is recognised through financial results. Notes 33 and 34 contain a description of these equity swap contracts.

  2. Effects of the fair value measurement of derivative financial instruments.

    The effect on equity is  -296 million euro, net of tax, relating to cash flow hedges and the loss or gain on the effective portion of derivative financial instruments, as explained in Note 16 about net equity.

    The main effects on results are presented below:

    • Losses or gains on the ineffective portion of cash flow hedges against future interest payments, amounting to 75 million euro, as explained in Note 27 on financial results.

    • Losses or gains from the measurement of equity swaps amounting to 125 million euro, as described in Note 27.

    • Other losses or gains, mainly relating to hedges against operating expenses (electricity) contracted by BAA in the amount of 31 million euro.

  3. Net investment in foreign operations

    As indicated in Note 3.2, when the capital investment in certain foreign operations is partly financed by specific debt contracted by the Group entities which participate in the capital of the projects, this debt is usually nominated in the currency of the project and it acts as a hedge against foreign exchange rate risk.

    With respect to net investments in foreign operations, foreign exchange differences arising from the monetary component of the investment are recognised as currency translation differences in equity.

    Set out below is a breakdown of the Ferrovial Group's hedges against net investments in foreign operations:

     Breakdown of the Ferrovial Group's hedges 2007Breakdown of the Ferrovial Group's hedges 2006