Agreement on swaps: Portugal will pay a 2.9% interest rate for Santander’s loan

  • ECO News
  • 13 April 2017

Portugal has reached an agreement with Santander concerning the swaps conflict. The Government will pay 529 million in outstanding interests and will maintain swaps currently worth 1,119 million.

“The Portuguese State and the Bank Santander Totta have reached an agreement aiming to end legal disputes concerning interest rates for the swaps contracts with public transport companies“, announced this Wednesday the Finance Ministry in a press release.

According to ECO, the agreement implies the Portuguese State will pay right away 529 million euros to the bank, representative of outstanding interests, and will maintain swaps whose current market worth is 1,119 million euros, a payment the State will progressively manage. Since they concern financial derivatives, the payment has no impact on the deficit, only on public debt: even so, if the State has to perform a new loan, it can use that treasury “cushion” to pay for it.

The agreement also predicts a 2.3 billion euros loan from Santander to the State to repay swaps. According to a source from the Finance Ministry, the interest rate for the loan “is not yet set, but it will be the swap rate, based in 15-year Euribor, with an additional spread of 185 basis points […]; if it were set today, the loan’s interest rate would be 2.91%“. This interest rate means the State would save 442 million euros.

Therefore, legal disputes taking place in English courts concerning interest rates for the swaps contracts with public transport companies are over.

According to the press release, the Portuguese State will make companies “serve the sentences already delivered by the court of London which recognize the validity of the said contracts“. The sentence concerns the December 2016 decision in which the London court mentions the swaps are valid, being at stake over 1.6 billion euros.

ECO was able to confirm the overall amount was 1.648 billion euros, out of which 529 million concern outstanding interest and 1,119 billion concern the amount whose payment period is still ongoing, until the end of the contracts. The Portuguese State will pay the first part at once, the 539 million in outstanding interests, and will manage the payment of the remaining 1.119 billion euros until the end of the contracts. The State is exempt from paying delayed interests for the outstanding interests (corresponding to 16 million euros) and Santander‘s legal costs (between 30 and 40 million euros).

At the same time, the Government will drop the request for the “admission of the pending appeal which has still not been accepted by the English High Court”. As for Santander, the bank will “drop the lawsuit and the indemnity request against the State and the Portuguese Treasury and Debt Management Agency [IGCP] pending in Portuguese courts”.

All current and future legal proceedings between Portugal and the United Kingdom are closed. “The agreement also establishes sharing expenses of the proceeding and delayed interests between the Santander Totta bank and transportation companies, which allows for those companies to have an additional saving of around 50 million euros”, the press release from the Finance Ministry explains.

To sum up, according to the Finance Ministry, “the terms of the agreement allow for a 36.8% decrease in costs associated with these swaps” — a percentage which corresponds to the State’s overall net amount of savings.