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Greenclose v National Westminster Bank plc: Difference between revisions
Greenclose v National Westminster Bank plc (view source)
Revision as of 13:27, 12 August 2016
, 12 August 2016→The Loan and the interest rate hedge
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Mr. Leach, of [[Greenclose]], was one of those fabled little old ladies of the law. He was also, the court found, a sophisticated and successful owner of family business running small luxury hotels in and around Wales. But he also seemed to be the wrong end of the [[interest rate swap mis-selling scandal]], wherein NatWest and others lent to mid-sized corporates on condition that they enter a derivative to their hedge interest-rate risk. In Leach's case, Greenclose was obliged to buy a rate collar for five years, and to grant the bank an option to extend it for seven years. | Mr. Leach, of [[Greenclose]], was one of those fabled little old ladies of the law. He was also, the court found, a sophisticated and successful owner of family business running small luxury hotels in and around Wales. But he also seemed to be the wrong end of the [[interest rate swap mis-selling scandal]], wherein NatWest and others lent to mid-sized corporates on condition that they enter a derivative to their hedge interest-rate risk. In Leach's case, Greenclose was obliged to buy a rate collar for five years, and to grant the bank an option to extend it for seven years. | ||
The notional point of the hedge was to protect Greenclose against interest rate rises over the term of the loan: interest rates being an uncommonly low 4.5% in 2006, and generally expected, in those good old days, to | The notional point of the hedge was to protect Greenclose against interest rate rises over the term of the loan: interest rates being an uncommonly low 4.5% in 2006, and generally expected, in those good old days, shortly to rise. | ||
The bank's theory here is interesting: "I will lend to you at a floating rate for ten years," says the bank. "But if interest rates rise too high, you may not be able to repay your loan. You may default. In that case, ''I'' lose. So therefore I need you to hedge your interest rate risk." | The bank's theory here is interesting: "I will lend to you at a floating rate for ten years," says the bank. "But if interest rates rise too high, you may not be able to repay your loan. You may default. In that case, ''I'' lose. So therefore I need you to hedge your interest rate risk." | ||
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Greenclose therefore borrowed at that handsome rate but also entered an extendable collar transaction under a 1992 {{isdama}} - the edition is important - which would expire on 30 December 2012 unless NatWest gave proper notice of its extension before that time. | Greenclose therefore borrowed at that handsome rate but also entered an extendable collar transaction under a 1992 {{isdama}} - the edition is important - which would expire on 30 December 2012 unless NatWest gave proper notice of its extension before that time. | ||
====The collar renewal in 2012==== | ====The collar renewal in 2012==== | ||