The company, a top 5 global Cargo Company, has been financing cargo aircraft via amortizing loans swapped to floating rates to eliminate interest rate risk. Under pressure to meet loan covenants and with rather scarce liquidity, the company has strived to structure the swaps with embedded options in a way to minimize the cost of funding and comply with IAS accounting provisions. Such derivatives were mostly transacted with financial counterparties under OTC contracts calling for cash collateral, which became increasingly expensive and drained the company of needed liquidity. The mark-to-market consequences were “skillfully” moved to the shareholders equity account in an attempt to stabilizing the volatility of the P&L and complying with the loan covenants calling for minimum acceptable returns on equity ratios.

financial risk fitness were approached by the chairman of the Board of Directors´ Audit Committee (and the CEO of the largest investor in the company) to counsel on possible re-structuring opportunities of the derivatives portfolio and stabilizing the volatility of the equity account.