Module 5 · Chapter 13

How the Loan Reads the Swap

The loan never names the swap, but it counts it, can default on it and will not guarantee it. This chapter reads the two contracts side by side and answers one question: is the swap debt?

≈ 14 min read 8-question test

In this chapter

  • How the loan counts the swap, and why the lenders had to consent
  • Where each contract can default, set off or guarantee against the other
  • Three correct answers to the question "is the swap debt?"

13.1Two contracts that point at each other

Atlas's loan, the Facility Agreement, never mentions the swap. It has no hedging covenant either, because the hedge was the board's own choice.

Yet the loan counts the swap as debt, limits that debt and puts the swap's payments into a covenant. It can also go into default over an unpaid swap. The Master Agreement looks back at the loan just as closely. This chapter reads each of these links in turn.

Key point

Every link between a loan and its hedge was drafted on purpose, and you can list them. Make that list before the first trade, not when something goes wrong.

Also in this chapter

  1. The loan counts the swap at its mark
  2. Why the lenders had to consent first
  3. Interest Cover takes the swap's cash, not its value
  4. Cross default runs both ways
  5. Set-off between the two contracts
  6. Why the swap has no guarantee
  7. Leaving the loan ends the swap
  8. How the Master Agreement keeps the bank's two roles apart
  9. Is the swap debt? Three correct answers
  10. When the loan requires the hedge
  11. Your job

Preview

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