Last month, we successfully unwound our BA Swap, and while it might sound like a meticulously timed strategy, the truth is a little simpler: we got lucky. But what mattered most was our confidence to make the trade in the first place and act decisively when the timing felt right.

What is a BA Swap?

During our last commercial real estate deal, we partnered with our lender to structure the mortgage debt as a BA Swap (Bankers Acceptance Swap) to hedge against rising interest rates. Here’s why:

We anticipated that interest rates would increase given the prevailing economic and political environment (January 2022). A BA Swap allowed us to lock in a fixed interest rate, insulating us from the risk of skyrocketing rates.

At its core, a BA Swap works like this:

  • If interest rates rise above the fixed rate we’ve locked in, the bank pays us the difference. ✅
  • If interest rates fall below the fixed rate, we pay the bank the difference. ❌

This type of arrangement acts as a hedge, ensuring more predictable financing costs during volatile periods.

Why Use a BA Swap Instead of Traditional Debt?

An additional advantage of the BA Swap is that it’s treated as a trade rather than a standard loan agreement. This means no prepayment penalties when the loan is refinanced—a significant benefit for deals with shorter time horizons like ours. Which on a $8M+ loan, can be substantial, $300k+ in fees.

In our case, the plan was to stabilize the property within 12-18 months and then refinance to unlock the created value. Avoiding hefty prepayment penalties saved us substantial fees, especially considering the size of the loan.

The Details of Our BA Swap Strategy

  • Trade Placed/Locked-In Rate: 1.75% (January 18th, 2022)
  • Exit Rate: 3.387% (February 24th, 2023)
  • Basis Point Change: 163.7

For context, each basis point change represented a gain or loss of $5,687 based on the total loan amount. Over the 13 months, this resulted in a total gain of $930,961—a respectable boost to the project’s returns.

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Why This Matters for Investors

This example illustrates the kind of value-add strategies active alternative asset managers can deliver. Utilizing tools like BA Swaps not only mitigates risk but also enhances the overall returns for investors.

In this case, the BA Swap was a critical component of the deal’s success, helping us navigate market uncertainty and generate nearly $1 million in additional value—all while safeguarding against interest rate volatility.

This approach demonstrates why partnering with experienced, proactive managers can lead to outsized results. It’s not just about timing but also about the willingness to deploy creative financial instruments to drive returns.