Module 4 · Chapter 11

The Refinancing, Termination Events and the Orphaned Swap

Repaying a loan early does not end the swap that hedged it. This chapter shows how a no-fault Termination Event lets the bank end the swap, and what the borrower had agreed.

≈ 15 min read 8-question test

In this chapter

  • Why repaying a loan early leaves its swap running
  • How a Termination Event differs from an Event of Default
  • How the bank ended the swap, and what Atlas had agreed

11.1What happens to a swap when its loan is repaid

In November 2028 Atlas repaid its loan early, with money from a new bank. The swap that hedged the loan did not end. It is a separate contract with Pellhaven, and under it Atlas pays a fixed 3% until July 2031. A swap left running after its loan has gone is an orphaned swap.

A paragraph of the Schedule now let Pellhaven end the swap. Atlas would then pay what the swap was worth to the bank.

Key point

Repaying the loan ends the loan, not the swap. The swap runs on until someone with a right ends it, and ending it costs money.

Also in this chapter

  1. What the refinancing paper left out
  2. The new loan and the repayment
  3. The swap with nothing underneath
  4. Two ways a swap can end early
  5. The paragraph that let the bank end the swap
  6. Why this is not a default
  7. Three ways out, and why only one was used
  8. The notice and its two 20-day limits
  9. “Who agreed this?”
  10. Your job

Preview

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