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Stubbornly Low Interest Rates Lead to $6.3 Million Loss

A pharmaceutical company that got its fingers badly burned when it entered into an interest rate swap in an attempt to hedge itself against fluctuations in interest rates has ended up with a bill for nearly $6.3 million following a High Court ruling.

The company was concerned that a rise in interest rates might lead to difficulty in servicing a $45 million term loan facility. It arranged the swap with a bank as the financial crisis loomed in 2008 but sustained substantial losses on the deal after interest rates remained stubbornly low amidst the gloom of the recession.

The company had refused to cover those losses on the basis that the interest rate swap had never become binding due to non-fulfilment of an alleged condition precedent. It was submitted that it had been agreed between the parties that the deal would be backed by a currency swap that was never in fact executed.

However, in dismissing the company’s arguments, the Court found that there was never any representation or agreement that the currency swap would be entered into. There was ample evidence that both parties had, throughout the negotiations, treated the interest rate swap as valid and binding and had conducted themselves accordingly. The Court’s ruling left the company liable to pay the bank $6,299,789, plus interest.