The Bf GoodrichRabobank Interest Rate Swap Case
Section ACG9
Kurtuluz Korkmaz  Murat Ongider  Jonathan Levi  Sumita Marwah
1. Is this an attractive alternative for the savings banks?
Early in 1983, BF Goodrich, diversified manufacturer of tires and related rubber products, needed $50M to fund its ongoing financial needs. It could have borrowed this amount from its committed bank lines, with borrowing cost above the prime, which was 10 5/8 %. It wanted borrow longer term with fix rates not to compromise its future flexibility. But longterm bond rates for BF Goodrich subclass, which was BBB Industrial, were in the range of 12.7513%, being quite high.
Rabobank, a major Dutch banking organization consisted of more than …show more content…
Maturity: 8 years
Coupons: Semiannually LIBOR+.50%
Rabobank issued a bond in the Eurobond market
Amount: $50M
Maturity: 8 years
Coupon: Annual fixed at 10.7%
Rabobank issued a bond in the Eurobond market
Amount: $50M
Maturity: 8 years
Coupon: Annual fixed at 10.7%
BF=>MB
$5.5M once each year for 8 years to cover 11% fixed annual coupon of $50M raised
BF=>MB
$5.5M once each year for 8 years to cover 11% fixed annual coupon of $50M raised
Market Rates at the time of the BF Goodrich  Rabobank Swap    Security  Rate  3 month TBills  8.07%  3 month LIBOR  8.75%  710 year AAA floating rate notes  LIBOR+.25%  710 year AAA fixed rate Eurobonds  10.70%  710 year BBB fixed rate notes  1212.5% 
Eventually, from Rabobank’s perspective, fixed rate borrowing and short swap position enabled it to enjoy a floating rate debt. Because Rabobank will pass 11% cash flows coming from Morgan Bank to bondholders and left with the payments of LIBORx. This rate is far below the rate, if it borrowed from the markets, that is LIBOR+.25%.
All in all, this is a pretty attractive borrowing option for the savings bank.
2. Is this a deal where everyone wins? If not, who is the loser?
The combination of BF Goodrich floating rate borrowing and its long swap position created a fixed rate debt for it. Its total payments LIBOR+.5% + 10.7%

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