Goodrich-Rabobank Interest Rate Swap Essays

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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?


Players: Morgan Bank, Rabobank, and B.F. Goodrich, Salomon Brothers,
Thrift Institutions and Saving Banks


In early 1983, Goodrich needed $50 million to fund its ongoing financial needs. However, Goodrich was reluctant to borrow (short term debt) from its
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Also, Rabobank had never borrowed in the Eurobond market prior to the deal with Goodrich, and Morgan. Since Rabobank conducted only small amount of dollar based business, and most of the dollar denominated assets were loans whose rates floated with LIBOR. Historically,
Rabobank was able to fund these loans through the following:

· Interbank deposits at LIBOR.

· Prime Eurodollar CD?s.

This was the first time that Rabobank would venture into the Eurobond market. Note: Because of Rabobank?s AAA rating it would be able to borrow in the Eurodollar market at very competitive rates.

Morgan Guaranty Bank:

Morgan acted as an intermediary guarantor between the Goodrich, and
Rabobank to implement the swap. Morgan was merely agreeing to act as a conduit assuming no default payments. In fact, if Goodrich defaulted it could not collect the floating rate stream from Morgan. The swap was a two way or no way transaction. This was true for the bilateral agreement between Rabobank, and Morgan also.

Morgan had an AAA credit rating, and an international reputation, this guarantee effectively lowered whatever credit risk might have otherwise been present in the swap agreement to acceptable levels for

In commissions, Morgan received an initial one time fee of
$125,000.00, and an undisclosed annual fee for each of the next 8 years. The going rate for

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