Swap Customer Wins Closeout Dispute
SEDA Expert Robert MacLaverty was engaged to provide a valuation of the swap on the close-out date for use in arbitration. Based on the strength of our analysis, SEDA’s client was awarded in arbitration an amount exceeding the close-out amount calculated by SEDA.
A real estate investor used an amortizing interest rate swap to convert their mortgage interest rate from floating to a fixed interest rate. The investor paid the fixed interest rate and received the floating rate. The floating rate payments received were equal to the floating interest rate payments due from the investor under the mortgage.
In 2022 the Federal Reserve began to raise short-term interest rates, and the rest of the yield curve rose in tandem with policy rates. As a result, the floating interest rate payments to which the investor was entitled became more valuable, while the fixed rate payments remained the same.
The investor prepaid the mortgage and requested a close-out of the interest rate swap at the same time. The counterparty terminated the swap, but made no payment to the investor, despite the changes in market interest rates that had made the swap more valuable.
SEDA Expert's Role
SEDA Expert Robert MacLaverty was engaged to provide a valuation of the swap on the close-out date for use in arbitration. SEDA sourced market swap rate data, modeled market swap rates with an interest rate model, and applied the fitted swap rates to derive and discount the remaining payments due under the amortizing interest rate swap. In addition to determining the close-out payment, SEDA pointed out that certain disclosures made to the investor by the swap counterparty could be interpreted to require an even greater payment at close-out.
Based on the strength of our analysis, SEDA’s client was awarded in arbitration an amount exceeding the close-out amount calculated by SEDA. The swap counterparty failed to put forward a comparable valuation, challenge SEDA’s valuation, or provide a compelling explanation for their erroneous disclosures to the investor.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
Robert MacLaverty is a managing director with SEDA Experts (SEDA) providing financial, economic, and testifying expert services to the nation's leading law firms, investment banks, pension funds, endowments, and foundations.
Learn more about SEDA at sedaexperts.com