BF Goodrich Fixed 12.50% Rabobank Floating L + 0.25% Total Cost L + 12.75% *BF Goodrich should borrow floating and Rabobank should borrow fixed
BF Goodrich Floating Rabobank Fixed (Semi-Annual) Total Cost
L + 0.5% 10.7% L + 11.2%
Total Savings to be Shared = L + 12.75% - L - 11.2% Total Savings to be Shared = 1.55% Step 2: Determine Annual Cost of $125K Fee (on Semi-Annual Yield Basis) Fee Calculation: Time 0 49.875 1 -5.500 2 -5.500 3 -5.500 4 -5.500 5 -5.500 6 -5.500 7 -5.500 8 -55.500 Cost (Annual Yield) 11.049% Cost (Semi-Annual Yield) 10.759% Less 10.7% Quoted Cost -10.700% Cost of Fee 0.059% Step 3: Determine Benefit of Swap to Each Party New Debt Issued: Terms: BF Goodrich Credit Rating: BBB Amount $50 Maturity: 8 Yrs Coupons: Semi-annual Coupon Rate: Annual rate = 3 mo. Eurodollar LIBOR + 0.5% Alt Cost of 8 Yr Fixed Rate Debt: 12-12.5% L-x <<< << Goodrich
(1+r/2)^2 = (1+x) solve for r
Terms: Rabobank Credit Rating: AAA Amount $50 Maturity: 8 Yrs Coupons: Annual Coupon Rate: Fixed at 11%, semiannual equivalent YTM = 10.7% Alt Cost of 8 Yr Float Rate Debt: L + 0.25% - L + 0.375%
<
L-x <
<
Morgan >>>>>>>>>>> 10.7+f+0.06
| | | L+0.5 to Bondholders
Rabobank >>>>>>>>>>>>>> 10.70%
Outside Fixed Cost: 12.5%
| | | 10.7% Fixed to Bondholders Outside Floating Cost: L +0.25%
Interest Rate Swap: BF Goodrich: Pay L+0.5% coupon payments semiannually on domestic debt Pay Morgan $5.5M annually, $125K initial fee and an annual fee of "f" Receive semiannual payments of L-x to cover its coupon payment obligations
Rabobank: Pay 11% coupon payments annually on Eurobond debt (10.7% semiannual equivalent YTM) Pay Morgan semiannual payments of L - x Receive $5.5M annually to cover its coupon payment obligations
Cost to BF Goodrich: CF to Bondholders: CF to Morgan: CF from Morgan:
Cost to Rabobank: CF to Bondholders: CF to Morgan: CF from Morgan:
-(L + 0.5%) -10.7% - f - 0.06% +(L-x)
-10.7% -(L-x) +10.7%
CF to Morgan: CF from BF: CF from Rabo:
10.7% + f + 0.06% - (L-x) (L-x) - 10.7%
Total Cost = -(L+0.5%) - 10.7% - f - 0.06% + (L-x)
Total Cost = -10.7% - (L - x) + 10.7%
Total to Morgan = 0.06% + f
If Fixed Cost = 12.5%: Then: -(L+0.5%) - 10.7% - f - 0.06% + (L-x) < -12.5% -L - 0.5% - 10.7% - f - 0.06% + L - x < -12.5% -0.5% - 10.7% - f - 0.06% - x < -12.5% -11.26% - f - x <-12.5% 11.26% + f + x < 12.5%
If Floating Rate = L + 0.25%: Then: -10.7% - (L-x) + 10.7% < -(L + 0.25%) -(L-x) < -(L+0.25%) x > -0.25%
Annual fee for similar swaps = 8 - 37.5 bp or 0.08-.375%. If f = .375% then, total fees to Morgan = .375% + 0.06% = 0.435%
If Fixed Cost = 12.5% Then: f+x < 1.24%
If Float Cost = L + 0.25% Then: x > -0.25% If Float Cost = L + 0.375% Then: x > -0.375%
