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Airport operator hedges US$58m Scotiabank loan

Published:Friday | May 13, 2022 | 12:08 AM

Pacific Airport Group, GAP, operator of Jamaica’s two largest airports, announced that it recently hedged the risk associated with its US$58 million in loans to develop the airport in Montego Bay, via an interest rate swap.

The capital projects at the airport are largely delayed due to the reduced traffic stemming from the pandemic. GAP, in fact, wants to delay the heavy projects until 2023, or about one year from when the projects were originally to end, according to GAP’s own documents. Its regulator, the Airports Authority of Jamaica, will make a determination later this year.

“On March 1, 2022, we entered into an interest rate swap with Bank of Nova Scotia in order to hedge the risk, the one-month LIBOR rate increasing on the two loans that MBJ Airport has in US dollars, for a total US$58 million,” said Mexico-based GAP in its annual report released last month. Bank of Nova Scotia trades as Scotiabank.

Neither party to the swap responded to requests for comment on the transaction.

GAP said the loans were pegged to LIBOR – the London Inter-Bank Offered Rate – the 3.10 per cent add-on interest charged by the retail bank. In its place, the company split the loan into two parts: US$30 million, which will accrue interest of 1.59 per cent, and the other US$28 million with interest of 1.785 per cent until the expiration of the loan.

GAP said the swap would be reflected under its other comprehensive income as a hedging reserve, in addition to the usual expensing of loans.

The swap comes against the background of rising rates, including the global financial centres that impact LIBOR. The Bank of England, for instance, raised its interbank rate to 1.0 per cent this month, its fourth hike in as many meetings.

Central banks the world over are trying to tame inflation by incentivising savings, but this has the effect of pushing up LIBOR, which was at 0.1 per cent in March 2021 but is now at 0.85 per cent.

The loan hedged by GAP relates to a transaction in September 2020 between MBJ Airport Limited, its subsidiary that holds the concession for the operation of Sangster International Airport in Montego Bay, and the bank.

MBJ Airports signed a loan agreement with the Bank of Nova Scotia Jamaica Limited and its affiliates for up to US$60 million that would be disbursed over 24 months. The loan has a five-year maturity with a two-year optional extension.

The first drawdown of US$30 million was earmarked for the airport’s capital development programme and other general corporate purposes, GAP said.

GAP operates 14 airports in its group, with 12 in Mexico and two in Jamaica.