A Favorable Swap Termination

Background

A client came to us wanting to terminate a swap.  They had executed a reverse swap (receiving a fixed-rate) to convert a fixed-rate private placement bond into a variable rate.  The client was now paying off the bond and needed to terminate the swap.  It had been several years since they had executed the swap and because interest rates had declined, the swap was “in-the-money” and had a positive value to them.

The bank had quoted the client a figure of $350,000 for how much the bank would pay the client to terminate the swap.

Consultation

DAG reviewed the documentation for the clients’ swap and modeled up its future cash flows in our pricing systems.  Because DAG uses the same technology and market pricing information as banks use, we could calculate the swap’s true value and see that it was much higher than the bank quoted the customer, close to $650,000.  Our goal was therefore to negotiate a higher payout from the bank to the client, obtaining as close to the $650,000 amount as possible.

Resulting Savings

DAG engaged the bank in a discussion about the value of the swap.  While the bank quickly agreed with us that the true value of the swap was close to the $650,000 amount, they offered a variety of reasons why they could not pay this much to the client on termination.  DAG’s experience with swap terminations gave us the opinion the bank was being disingenuous and simply inflating the profit margin it was earning on the termination.

DAG asked the bank to support its lower value for the swap with market-based calculations.  DAG was able to show the client, and the bank, that the bank’s figures were biased and this skewed the termination value in the bank’s favor.

After several rounds of negotiations based on DAG’s analytics, DAG was able to get the bank to agree to pay a higher termination value of $630,000 to the client.

Savings to Client:          $280,000