Think Twice Before You Enter an Interest Rate Swap

An office worker talks on his phone as he looks the stock board at the Australian Securities Exchange building in SydneySwap Negotiators recently received a call from an attorney in Boca Raton, FL who represents two doctor groups that he brought to us five years ago.  One of the groups chose to work through us and the other decided that they could handle things on their own.  As evidence of their ability, they let us know that they had gotten the bank to reduce its loan spread by 12 basis points under what we had achieved.

Now their attorney was calling because the “we-can-handle-it-ourselves” group was looking to unwind their interest rate swap and found themselves substantially under water.  They sent us the swap to analyze.  It turns out that the bank had added 40 basis points to the undisclosed break-even cost of the swap.  That resulted in a profit to the bank of $805,000 and contributed greatly to the high negative value of the swap today.  What is the saying about no such thing as a free lunch?

In this case, the bank had executed a sophisticated bait and switch.  BTW, the “we don’t have the expertise to handle it ourselves” group had us execute a swap at about the same time.  An analysis of that swap revealed a minimal bank profit and a minimal resulting negative value.

When all is said and done, the go-it- aloners saved $250,000 in loan spread and paid $805,000 in swap spread.  You do the math. Yes, the bank had the advantage because the borrower couldn’t see the real costs.  But it didn’t have to be that way.  The borrower could have used a swap negotiator who had the same models and inputs as the bank to determine price and saved themselves about a half million dollars.

I am sorry for this group, but very pleased to confirm that we made such a big difference for the guys who knew what they didn’t know.

Steve Pishko, Swap Negotiators