Page 42

CREFW-Fall2014 10.15.14

Figure 3 Types of Swap Mismatches by Size Buckets Source: Collyer Bristow Solicitors Borrowers Achieved Actual Redress in Out-Of-Court Settlements Wide Distribution of Redress Amounts The data on actual out-of-court settlement cases provided by Vedanta Hedging Ltd. offers some interesting statistics. Again, we accept the sample size’s limitations and look forward to expanding it in future. Based on Figure 4, we can see a wide distribution of the redress amount when compared with the original notional amount of the swap. Please note that the chart excludes two large swaps. In aggregate, borrowers have been able to settle for an amount of GBP 104m in cash and cash-equivalent for these 67 cases. This is 18% of the total original swap notional value across these cases. This redress is limited to cash and cash equivalent compensation. It includes the cash equivalent amount of any release from future obligations (including swap breakage) under the swap. Please note that the redress also includes compensation for consequential losses. This might include business opportunities that the borrower was unable to profit from as a result of the swap encumbrance. But, the GBP 104m excludes any concessions on loan refinancing and/or restructurings. According to Vedanta, beneficial financing terms are present in about two thirds of the cases. They typically involve a lower credit margin, a larger loan, a longer term, a capital repayment holiday or relaxed covenants. These concessions are too CRE Finance World Autumn 2014 40 difficult to quantify consistently and have therefore been excluded. If we finally consider Figure 5, we get an unexpected result. One would expect a bigger redress for swaps with more mismatches, like with the larger swaps. But, larger swaps are in fact getting smaller relative redress amounts. This seems counterintuitive to Figure 3 where we showed higher mismatches for bigger swaps. In the Vedanta sample, we have no evidence to support this premise. Figure 4 Sample of 67 settlement cases of GBP 575mn Source: Vedanta Hedging Ltd. Figure 5 Distribution of redress to borrowers and profits to desks Source: Vedanta Hedging Ltd. Swaps Impact on the UK Lending Market: A Closer Look at the Evidence


CREFW-Fall2014 10.15.14
To see the actual publication please follow the link above