The downside to this hedge is that without default risk, a bank may have no motivation to actively monitor the loan and the counterparty has no relationship to the borrower.
In addition, credit assessments reflect not only the long-term perceived default risk, but also short or immediate term political and economic developments.
However, when the swap is negotiated through an intermediary financial institution, usually the intermediary assumes the default risk in exchange for a fixed percentage of the transaction (the bid-ask spread).
