The Bf Goodrich-Rabobank Interest Rate Swap Case

653 Words Feb 28th, 2013 3 Pages
The BF Goodrich-Rabobank Interest Rate Swap Case
Section AC-G9
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 long-term bond rates for BF Goodrich subclass, which was BBB Industrial, were in the range of 12.75-13%, being quite high.
Rabobank, a major Dutch banking organization consisted of more than
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Amount: $50M
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 T-Bills | 8.07% | 3 month LIBOR | 8.75% | 7-10 year AAA floating rate notes | LIBOR+.25% | 7-10 year AAA fixed rate Eurobonds | 10.70% | 7-10 year BBB fixed rate notes | 12-12.5% |

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 LIBOR-x. 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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