mergers & acquisitions 43 Interest rate swaps


Medium-sized businesses are in a race to claim as the FSA and lawyers turn their backs, writes Rich Eldridge, partner, head of finance law, Manches LLP


Overview


Many medium-sized businesses that were missold interest rate swaps are running out of time to challenge them. As the time periods in which many swaps can be challenged start to expire the FSA is only helping small businesses and most law firms with the necessary expertise are unable to challenge the banks as they fear losing the banks as clients.


Background


At Manches we are working on claims against banks due to the misselling of interest rate swap deals under which companies swapped their liability to pay interest based on a floating rate for a higher fixed rate of interest.


When some of these businesses asked for additional loans from their lenders to fund expansion they found their lenders had no money to lend. These businesses tried to move to a bank with money to lend. The new bank insisted on taking over the whole of the financing of these borrowers. When these borrowers tried to leave their existing bank they were asked to pay astronomical fees to get out of their swaps.


Other businesses are in financial difficulties. Examples include businesses struggling to meet interest cover tests in their loan agreements where, if their profits do not exceed their interest payments by a certain amount, the bank can recall the loan or charge fees.


If these businesses had benefitted from


the low floating interest rates, rather than being stuck with high fixed interest rates due to their swaps, many of them would not be facing difficulties.


It is clear many swaps have been missold. Borrowers are upset because they were not told of the potentially multi-million pound fees to get out of their swaps. Although the fees are vaguely provided for in the small print it is not possible to foresee the potentially astronomical amount of the fees from the wording. Borrowers feel that, rather than being offered helpful protection against an increase in the floating rate, they were forced to enter into swaps to increase the profits of the banks.


Silver lining


There is a silver lining to the cloud. As well as avoiding swap termination fees and moving to a floating rate of interest borrowers who have been missold swaps can claim back some of the interest they have paid. Claiming back paid interest will provide a welcome boost to the finances of many businesses.


THE BUSINESS MAGAZINE – THAMES VALLEY – SEPTEMBER 2012


Small businesses are uncomfortable that the banks who let them down are reviewing their own potential missellings. They are particularly concerned as the banks have a get out – a borrower will not be a “non- sophisticated” investor if it had the necessary experience and knowledge to understand the swap including the risks involved.


It is a www.businessmag.co.uk Race against time


There is an increasing urgency for borrowers to challenge swaps as many will soon be “time barred” from challenging them. Borrowers who want to avoid a swap termination fee, move to a floating rate of interest and claim back paid interest must usually start their claim within six years from the date the swap was entered into. Many of the swaps were entered into during 2006 and 2007, with the six year limitation periods expiring this year and during 2013.


Big picture increases chance of early settlement


Settlements are usually achieved without having to go to court. Banks are desperate to avoid a high-profile court decision against them before most swaps are outside of the six year claim period. So far every case in the country has settled before a court decision.


The FSA turns its back


Many borrowers were hoping the FSA would come to their rescue. However, although some banks have agreed to provide redress where they have missold swaps, this only applies to “non-sophisticated” borrowers. To be a non-sophisticated borrower the borrower must meet at least two of three criteria - turnover of £6.5 million or less, balance sheet total of £3.26m or less and not more than 50 employees. These are tested by reference to the financial year in which the swap was entered into. The thresholds are too low to help medium-sized businesses.


In any event small businesses are concerned about how helpful the outcome of the FSA’s review of swap misselling will be. An independent reviewer will review the redress exercise and intended process of each participating bank, but it seems the actual review of cases to see whether swaps have been missold will be carried out by the banks. Borrowers will be able to have the independent reviewer present during any meetings or telephone calls, but the independent reviewer will only be acting as an observer to ensure the process is fair. The reviewer will not be independently investigating each swap.


question of opinion whether a borrower has this level of understanding and it looks like it will be primarily the opinions of the banks that count.


Some small businesses are not relying on the review of cases by the banks and asking us to take action on their behalf. They feel letters to the bank and the FSA from a law firm will show they are serious and ensure the bank properly looks into their swaps.


Law firms also turn their backs


The predicament for businesses is made worse by the conflicts of interest at most of the law firms they would usually turn to for help. There are few law firms with sufficient expertise in swap products to challenge the banks. Most of the law firms with the expertise received huge fees from the banks during the debt boom and still receive large amounts of fees from the banks today for restructuring the boom time deals that have gone wrong. These firms are afraid of upsetting their bank clients, particularly when it is often a condition of acting for the banks that the law firms will not sue them.


Action


With the right support businesses that have been missold swaps have a great chance of winning against the banks.


If you or any of


your contacts feel they have been missold an interest rate swap contact us for a free discussion.


Details: Rich Eldridge 0118-9822651 07912-242154 rich.eldridge@manches.com


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