If you are looking to move your commercial banking relationship/loan over to a new bank, but you already have a swap booked with your current lender that you are looking to leave, what are the alternatives in dealing with this existing hedge?
The assumption is that the swap is out of the money and the hedger would owe its existing swap bank to terminate the swap early.
Alternative 1 - Keep the swap with the existing bank, but move the borrowing relationship to a new bank
If loan is secured, and the collateral will be moving to the new bank along with the loan, this is not very likely. The existing bank will not want to be in an unsecured swap, nor with a counterparty where there is no longer a relationship. However, if there is a relationship that will remain with the existing bank, or in the rare instance where the swap was unsecured to begin with, there may be a chance of keeping the swap in place. Given the low likelihood of this set of circumstances, the following alternatives are much more practical.
Alternative 2 - Terminate the hedge with the existing bank
This is typically the easiest and is certainly the cleanest alternative. However, if the termination comes at a cost, funding the breakage becomes a cashflow issue and it may need to be financed via the new loan. A new hedge that matches the new loan can then be executed with the new lender at current (and lower) market rates.
Alternative 3 - The new lender steps in between the client and the existing bank
The new lender will need to be reimbursed for taking on this new swap exposure, typically by increasing the fixed swap rate, or alternatively receiving an up front fee. However, the existing bank may choose to make this difficult. The existing hedge bank may refuse to allow the assignment of the swap to the new bank based on competitive, credit, and/or capacity issues.
Furthermore, the existing hedge provider may require a fee that is not credit based but rather nuisance based.
Alternative 4 - Swap is transferred from the existing bank to the new one
This is akin to "buying" the position from the existing bank. Again, the existing bank may choose to make this difficult based on price. Where the swap is out of the money to the hedger, the new bank would have to make payment to the existing hedge bank to terminate it, and would put in place a new off-market swap with the client. This method has the added expense over Alternative #3 as now this position needs to be hedged in the market by the new bank who will have to pay a bid/offer spread to do so.
The caution here is that in most circumstances, the price at which the existing bank is willing to unwind can be considerably marked up. If so, this mark-up will have to be reimbursed to the new swap bank either through a higher rate and/or a fee.