Today the FD published an article about banks advising on interest-rate swaps. The article implies that in the past ABN AMRO incorrectly advised SMEs on swaps and that the SMEs have been left holding the baby: "SME’s have the mill stone of Interest rate swaps’ round their necks".
ABN AMRO distances itself from this comment. Interest-rate swaps are and were only advised if appropriate/suitable for the customer. The issue also needs to be put into perspective. On our website you can find out what an interest-rate swap is and how it works.
Negative value and consequences thereof
The FD headlined last month: "SMEs EUR 4 billion in the red; these swaps are to be settled in the coming years and threaten to further erode the financial position of SMEs”. On May 28th the AFM reported it concerns a negative value of EUR 2.7 billion and also places the consequence of the negative value into perspective: "The fact that the current value of a derivative is negative, does not necessarily lead to problems since the value of a derivative drops to zero with the passing of the maturity."
When is this a problem?
If the company wants to or has to change the deal specifics of its interest-rate swap during the maturity it may be faced with additional costs. This occurs when the interest rate has dropped giving the swap a negative value. Similar charges apply when the company has a long-term loan with a fixed interest rate and it has to or wants to change the deal specifics while the interest rate has dropped. If the swap runs through to the end of the term there is no problem. More explanation about how this works can be found on our website.
Situations where a company wants to or is forced to end its contract are bankruptcy or restructuring. The AFM figures show that in the Netherlands around 35,000 companies are (possibly) dealing with such a situation. Around 1,400 of these have an interest-rate swap.
The AFM figures also show that Dutch businesses together have 17,000 interest-rate swaps. Of which some 6,000 are with ABN AMRO. This on a total of 400,000 SME’s that have a bank loan. A total of 130 complaints have been made with banks about these 17,000 swaps, including 25 at ABN AMRO.
An anonymous ex-ABN AMRO employee tells the FD that in 2004 he supposedly sold a so-called ‘Snowball Ratchett Swap’ and that he could determine the margin with the help of a programme called ‘Super derivatives’.
Both the product and the programme are not known at ABN AMRO. Furthermore ABN AMRO does not recognise the other claims of the other anonymous former employee about how customer advisory took place in that period and distances itself from these statements.