A research produced by DTZ
Many borrowers might finally be able to enter into a more productive phase of discussion with their lenders, in respect of their legacy property loans. This will require a close review of the swap positions associated with these loans. This review will need to assess whether the swaps were appropriately structured and/or sold. A number of borrowers are likely to have a strong enough case to convince lenders and swap providers to provide concessions in loan restructuring and/or financial compensation in redress. This view is supported by new external data.
To eliminate the risk of loan default due to changes in interest rates, a floating-to-fixed rate swap contract was typically put in place. However, new data from law firm Collyer Bristow suggests that these swaps were not always structured or sold appropriately. If the swap’s term exceeds that of the loan significantly, risk management might not have been the main objective.
Poor structuring aside, one can argue that insufficient or incomplete information provided could represent mis-selling. This potential mis-selling has also been the focus of an existing swap compensation scheme for SME borrowers, put in place by the FCA mid 2012. An FCA pilot study found that 90% of tested SME swaps did not comply with regulations. Most commercial property investors are not eligible under the scheme, but may still be able to make legal claims
Despite this, nearly 70 commercial real estate borrowers have already successfully settled existing swap issues out-of-court, based on data from Vedanta Hedging Ltd. The weighted average settlement has been 18% of the original notional swap amount, for a total amount of GBP 104m in cash or cash equivalent.
Based on this evidence and some key assumptions, we estimate that UK borrowers might be able to claim between GBP 5-10bn in and/or financial redress related to their swaps over the next few years. This assumes that between one in five to one in ten commercial property will be able to show similar issues with their swaps as highlighted in the Collyer Bristow data. Also, it assumes an 18% redress settlement, as per Vedanta data.
Source : DTZ (Groupe UGL)