Goodrich-Rabobank Interest Rate Swap
1. How large should the discount (X) be to make this an attractive
deal for Rabobank?
2. How large must the annual fee (F) be to make this an attractive
deal for Morgan Guaranty?
3. How small must the combination of F and X be to make this an
attractive deal for B.F. Goodrich?
4. Is this an attractive deal for the savings banks?
5. Is this a deal where everyone wins? If not, who loses?
Introduction:
Players: Morgan Bank, Rabobank, and B.F. Goodrich, Salomon Brothers,
Thrift Institutions and Saving Banks
Goodrich:
In early 1983, Goodrich needed $50 million to fund its ongoing
financial needs. However, Goodrich was reluctant to borrow (short term
debt) from its committed bank lines because of the following reasons:
1. It would lose substantial about of its remaining short term capital
availability under its bank lines.
2. It would compromise its future flexibility by borrowing in the
short term.
Instead, it wanted to borrow for an 8 year range (or longer) at a
fixed rate.
However, since the general level of interest rates were pretty high,
and Goodrich?s credit ratings had dropped from BBB to BBB-. Goodrich
believed that it would have to pay 13% interest for a 30 year
corporate debenture.
Salomon Brothers had advised Goodrich that they could borrow in the US
public debt market with a floating rate debt issue tied to the LIBOR,
and then swap payments with Euro market bank that had raised funds in
the fixed-rate Eurobond market.
Note: The reason that Salomon were confident that this could be done
is described as follows:
1. There was a recent deregulation of deposit markets had allowed
deposit institutions to offer n...
... middle of paper ...
...% - (x1+11.2%) = 1.3%-x1.
7. From (2), and (5) Rabobank saves the following amount in
semiannual interest payments: LIBOR ? 1/8% - (LIBOR ?x2) = x2 ?
1/8%.
8. For this deal to occur, Rabobank, Morgan, and Goodrich must
profit hence the following also must be true:
a. (x1-x2)>= F where 37.5> F> 8 (footnote #2 on page 362).
b. 130 ? x1> 0 i.e. 130> x1
c. X2 ? 12.5> 0 i.e. x2> 12.5
Assuming that x2 = 20 basis, and x1 = 100 basis. We can conclude the
following:
Goodrich pays a fixed interest of 11.2% + 1% = 12.2% a savings of 20
basis points (after transaction costs).
Rabobank saves a total of 2% - 1.8% = 20 basis points.
And Morgan collects 2% - 1.25% = 75 basis points in fee, in addition
to the $125,000 one time fee.
Note: The total savings that this deal provides as a result of the
swap is: 5 + 20 + 75 = 100 basis points.
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...ding on the type of savings account I have and bank. I picked Saving rather than investing because theres a risk in investing , if the company or whatever I'm investing in doesn't work out I can lose a substantial amount of money and I can't use it right away until the interest builds or the company grows. With spending it feeds my personal needs but won't benefit me in a smart way. I can buy luxuries, I can't use it on emergency if I'm spending it all, but I can use it now. Theres also no growth involved in spending it. Saving is the best alternative for me and the economy its safe and secure. I gain more with saving than I could spending and investing. Also by saving the bank is able to lend out money people need, and later paying me back more in return. That will benefit the businesses and grow the economy. Overall saving is the way I would spend my 1,500 dollars.
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