The following Restructuring & Insolvency practice note produced in partnership with Matthew Shankland and Sarah Lainchbury of Sidley Austin LLP provides comprehensive and up to date legal information covering:
Prior to September 2008, numerous small and medium-sized enterprises (SMEs) entered into interest rate hedging products (IRHPs) to support borrowing with major financial institutions. In the wake of the collapse of Lehman Brothers and the ensuing financial crisis they found themselves paying for either swaps which they did not need or paying far more than was originally envisaged to terminate the products.
Typically, the purpose of IRHPs was to protect against fluctuations in interest rates. These can be broken down into:
swaps—which fix interest at an agreed rate
caps—which create a limit on any interest rate rises
collars—which limit interest rate movements within a specified range, and
structured collars—which limit interest rate movements within a specified range, but also involve arrangements where, if the reference interest rate falls below the bottom of the range, the interest rate payable by the customer may increase above the bottom of the range
Banks commonly made the purchase of IRHPs a condition to lending or strongly encouraged SMEs to enter into them to protect against the perceived threat of rising interest rates. However, with the Bank of England’s Monetary Policy Committee having held interest rates at or below 0.5% between 2009–2017, interest rates in that period have remained at historically and unprecedentedly low levels. The consequence is that numerous businesses have been
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