HXM » Topics » 11. Financial Instruments

This excerpt taken from the HXM 20-F filed Jun 29, 2009.

11.  Financial instruments

 

Financial Instruments Related to the Senior Guaranteed Notes

 

As disclosed in Note 10, the Company’s Senior Guaranteed Notes are US dollar denominated. In order to convert the principal of the US dollar bonds to Mexican pesos, in September 2005 the Company entered into two “Principal-Only Swaps” with a notional value of US$250 million, which entitled the Company to receive this amount in 2015 in return for a payment in Mexican pesos at a fixed exchange rate of 10.83 Mexican pesos per US Dollar. As part of this agreement, the Company paid interest of 2.92% a year on the total notional amount in US dollars, in semiannual payments.

 

The Principal-Only Swap transaction did not meet hedge accounting requirements, and thus all changes in the fair value of the underlying derivative were recorded in the Company’s current earnings as a component of comprehensive financing cost within the valuation effects on derivative instruments account. As of December 31, 2007 and 2006, the fair value of this derivative was Ps. 79,098 (US$7.2 million) and Ps. 227,075 (US$20.2 million) which represented the estimated present value of future cash flows to be paid out by the Company.

 

On July 5, 2008 the Company cancelled its Principal-Only Swap by paying Ps. 54,434 (US$ 5.3 million).   No gain or loss was recorded upon cancelation of the Principal-Only Swap agreement as it was already recorded at fair value.

 

On July 6, 2008 the Company entered into new derivative instruments in order to cover the possible changes in the exchange rate of future interest payments of the Senior Guaranteed Notes for US$250 million (“Interest-Only Swap”). This new transaction also does not meet hedge accounting requirements, and thus changes in the fair value of the underlying derivative have been and will be recorded in the Company’s current earnings as a component of comprehensive financing cost within the exchange (gain) losses account. As of December 31, 2008 the fair value of this derivative was a favorable asset position of Ps. 65,975 (US$4.8 million) (see Note 9).

 

The net accumulated effect in the statement of income of the Principal-Only Swap and the Interest-Only Swap for the years ended December 31, 2008 was Ps. (90,639).

 

Other Financial Instruments

 

During the normal course of operations the Company maintains net liability positions in foreign currency (US dollars) which are originated by its operations’ short and long-term liabilities. During 2008, the Company entered into hedging derivative financial instruments that were expected to mitigate the risk associated with the exchange loss in the acquisition of foreign currencies. However, due to the recent volatility in the exchange rate between the Mexican Peso and US dollar, the Company decided to cancel and or otherwise restructure all its hedging derivative financial instruments. At December 31, 2008, the Company only has the Interest-Only Swap described above. The Company had an impact in its statement of income of approximately Ps. 404,601.

 

The net valuation effects of financial instruments for the years ended December 31, 2008, 2007 and 2006, were Ps. 313,962, Ps. (147,977) and Ps. 101,895, respectively.

 

F-28



 

This excerpt taken from the HXM 6-K filed May 16, 2007.

11.   Financial Instruments

        In order to convert the principal of the U.S. dollar bonds to Mexican pesos, in September 2005 the Company entered into two "Principal Only Swaps" with a notional value of US$250 million, which entitles the Company to receive this amount in 2015 in return for a payment in Mexican pesos at a fixed exchange rate of Ps.10.83 per dollar. As part of the derivatives structure, the Company will pay interest of 2.92% a year on the total notional amount in U.S. dollars, in semiannual payments. The transaction is an economic hedge, but because it does not meet current hedge accounting requirements, it was classified and recorded as a trading derivative. As of December 31, 2006 and 2005, the fair value of this derivative was $218,847 (US$20.2 million) and Ps.123,047 (US$11.3 million) respectively, which represents the estimated present value of future cash flows to be paid out by the Company. This unfavorable balance does not represent cash outlay given the restructure of Principal Only Swaps. Changes in fair value are recognized in current earnings as a component of comprehensive financing cost within the exchange losses account.

EXCERPTS ON THIS PAGE:

20-F
Jun 29, 2009
6-K
May 16, 2007
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