Two million pound 'swap' puts pub chain out of business

'They rang us this morning...half an hour later the administrators arrived'

Two men, Mike Lloyd and Rodney Hall, have spent the last twenty years building up their company, Sarumdale Ltd, with12 branches across the South of England.

This morning, two decades of work came to an end when their bank, the bank whose advice they trusted and took, phoned them to tell them they were being put into administration:

"They rang us this morning...half an hour later the administrators arrived", not just at their main office, but teams of managers and stock takers turned up within 30 minutes at each of the pubs to go to work.

From that moment on the two men who've put their careers into creating a business that employs 140 people, were removed from the day to day running of the company - their livelihoods gone, their lives changed for ever.

It is the sad truth that lots of companies fail.

Many go out of business, for all sorts of reasons. In this case however, Sarumdale identifies one reason, and one reason only why things have ended this way.

As we reported last month, as many as 400 companies have been taking legal advice over interest rate swaps, sold by many high street banks often alongside business loans to companies big and small right around the UK.

Barclays told me:

For the owners of Sarumdale Ltd, they have no doubt in their minds it was one of these swaps that went badly wrong that has pushed them out of business, and tonight, has put 140 jobs at risk.

According to Lloyd and Hall, in 2006 Barclays forced them to take out a 10 year 'swap' alongside a business loan; essentially an insurance policy to protect the company against any future rises in interest rates.

They say they were warned rates might increase and convinced that taking out this protection would keep their costs down if that happened.

They said: "We felt it was the best thing to do, and they (Barclays) were advising us to do it."

They told me: "We didn't have any choice at all, but we felt the bank was on our side".

The swap was, they tell me made an "explicit condition" of taking out their loan.

In the end the company ended up taking out five separate hedges in a bid, they thought, to protect themselves.

They say they were not warned that if rates fell the costs of the swap would go up massively.

And that the costs of getting out of the policy would also be huge.

As recession hit, in 2008 interest rates did start to fall, and carried on the journey down to 0.5 percent where they have been stuck for three long years.

While the swaps would have minimised their costs if interest rates had gone up, they have increased them as interest rates have gone down.

They calculate the swaps have cost them more than two million pounds, including extra interest payments and fees.

Those huge ongoing costs have pushed the business into arrears, month by month pushing them further and further behind.

To try to stay afloat they sold some of their premises.

And just ten days ago, Lloyd and Hall say Barclays lent them another million pounds in order to pay to get themselves out of the swap deal.

But after a review by the independent experts Begbies appointed by the bank, the bank decided to put them into administration.

Sometimes the best thing for the health of the economy, the health of the banks and their shareholders, is to take the drastic action of putting a company into administration.

This is clearly the position the bank has taken in this case. This is a company that has had financial problems for several years.

But the former owners are adamant the company would have been profitable if it had not been for the heavy costs of the swap and fees piled on by Barclays.

In a dignified manner they told me: "We haven't shouted and ranted and raved...but it has been taken away from us purely as a result of the swap."

After two decades of hard work it is no surprise that the two men are devastated.

It is hoped the administrators will be able to save some some of the pubs and therefore many of the 140 jobs - but the future for their former employees is uncertain.

Amid mounting numbers of complaints from firms around the country the Financial Services Authority is considering whether to launch a full blown investigation into swaps. They will make that decision by the end of the month.

The issue at hand is not whether swaps were a good idea. Taking out this kind of insurance became common, and in principle it is not even that disimilar to a fixed rate mortgage.

Sure, you might feel like you're paying over the odds if interest rates go down, but if they go up you might be very glad of the protection.

But the issue is whether or not these products were mis-sold, whether firms had the full implications of the policies explained to them.

A decision is expected in the next fortnight and I have just learned that MPs are going to debate the issue of swaps next week.