Interest Rate Swap Example

Attorneys advising commercial real estate clients on interest rate swap transactions can benefit from the services of a swap negotiator.

An Interest Rate Swap Example

A real estate attorney was contacted by a client wishing to enter into an interest rate swap agreement.  The description of the swap indicated that it would be based on 1-month LIBOR (London Interbank Offered Rate), have a 5, 7, or 10-year term, and that the notional amount would be structured on a 20-year amortization schedule. As of March 5th, 2013, these breakeven swap rates would be 0.82% for 5 years, 1.26% for 7 years, and 1.73% for 10 years.  How do I best advise my client and what does all this really mean?

LIBOR Explained

First, the London Interbank Offered Rate or LIBOR rate is the average interest rate that they would be charged if borrowing from other banks, or estimated by leading banks in London.  It is the primary benchmark for short-term interest rates around the world.

Interest Rate Swaps Explained

interest rate swap example - swap negotiatorsAn interest rate swap is a widely used financial derivative instrument in which two parties agree to exchange interest rate cash flows.  In its most common form, a commercial borrower will pay an agreed fixed rate (“swap rate”) in exchange for the “swap counterparty” to take responsibility for payment of its floating rate obligation.

In the commercial real estate attorney’s interest rate swap example, the breakeven swap rates show the fixed rate a commercial borrower would have to pay (not including any loan spread) if they entered into a swap agreement where the borrower received the floating 1-month LIBOR rate.

If a commercial borrower enters into a 7-year interest rate swap, for example, they would pay a fixed rate of 1.26% for 7 years and in return they would receive interest payments based on the 1-month LIBOR rate.  The borrowers interest payments would be fixed while the money they received from the swap would be variable based on the 1-month LIBOR rate.

The swap also indicated that it will be quoted at mid-market breakeven. This means the rates were reported at the average of the bid and ask prices of the market; it is considered the fair market value.  Additionally, as indicated in the interest rate swap description, the swap settles interest payments each month.

How Swap Advisors Can Help Attorneys

Advising clients on interest rate swap transactions can create a new revenue stream for attorneys.  Although these contracts are complicated financial transactions, a swap advisor can assist the attorney and his client in translating the banks information into plain language, taking the mystery out of a swap contract.  Having worked on the derivatives side of the bank, a swap advisor is the best defense to negotiate pricing and terms while reducing interest expense. Without a swap negotiator there is no transparency, and the bank can easily quote inflated pricing without the borrower’s knowledge.

Clients Save Hundreds of Thousands of Dollars

By partnering up with a swap advisor, the attorney’s commercial real estate clients can save hundreds of thousands of dollars.  How’s that?

Banks have historically charged excessive, uncontrolled, and undisclosed fees on all types of interest rate swap transactions allowing them to profit greatly by adding these hidden fees.  A swap advisor has access the same live data and computer models as the bank, which creates transparency and thereby reduces or eliminates banks’ undisclosed fees.  By working with a swap negotiator, clients gain peace of mind that their interest rate swap transaction is being handled by an expert and that their bank has not unfairly profited.

Attorneys advising commercial real estate clients on interest rate swap transactions can benefit from the services of a swap advisor by creating transparency, providing peace of mind to their clients, and helping them save a significant amount of money in these complicated financial transactions.

About Swap Negotiators
Located in Central Florida, Swap Negotiators provides advocacy, expertise, and advice on interest rate swap contracts for commercial borrowers and works in partnership with banks, commercial real estate attorneys, and mortgage brokers to provide transparent pricing, valuations and ongoing support for the life of a swap. Additional information about Swap Negotiators can be obtained by calling (407) 264-7264 or by visiting www.swapnegotiators.com.