With banks back in the mix and swap rates inside of Treasurys, many borrowers are fixing floating-rate loans with swaps.
A common misconception is that you can’t have representation on a lender-placed swap. While 99% of swaps are executed with the underlying lender, a hedge advisor can still bring their expertise to your side of the table.
Too often, borrowers who forego a hedge advisor don’t negotiate the ISDA agreement. Banks often present it as a boilerplate form that “just needs to be signed before locking.” In reality, the ISDA is a highly negotiable document that governs the transaction.
Why it Matters
Under many ISDAs, if the lender exits the credit before the swap matures, that’s an Additional Termination Event (ATE). Lenders generally intend to hold loans full term, but sales happen. For instance, BX purchased a $2bn portfolio of CRE loans from AUB earlier this year.
The Risk
If your swapped loan is sold to an investor without a swap desk, a boilerplate ISDA could be used to terminate the swap through no fault of your own.
If the mark-to-market (MtM) is against you at that time, that can mean an unexpected payment due to the bank within days.
The Fix
Including an ATE carve-out that renders the provision inapplicable if the lender voluntarily exits the credit mitigates this risk.
There are numerous other provisions worthy of review too.
ISDAs are just one of several areas where a swap advisor can add outsized value - before, during, and after execution. If you’re working on a swap and would like to discuss how we can potentially help, please reach out to Pensfordteam@pensford.com or 704-887-9880.