Nick Dunbar writes for the Financial Times about LOBO (Lender Option Borrower Option) loans taken out by local councils between 2001 and 2011. With maturities going up to 2078, their features can be summarised succinctly. The derivative wrapped inside a LOBO loan goes by the name of a Bermudian cancellable swap. At specific dates, either yearly or at longer intervals, the lender has the option to increase the interest rate. The borrower either can accept the increase or choose to repay the loan early (this is the “borrower option”).
Risky Finance worked with Vedanta Hedging to value the 800-odd contracts. The embedded swaps, having reached a peak valuation of £12bn in favour of the banks at the end of 2021, have since lost 91 per cent of their value.
Please see below for the full Financial Times article:Vedanta FT article Crunch time for LOBO