Goodrich—rabobank Interest Rate Swap Case

B. F.  Goodrich—Rabobank Interest Rate Swap Case

Study Questions

1. Outline the structure of the swap financing proposed by Salomon.  Which form of debt does BF Goodrich prefer and why?  Rabobank?  What does the swap accomplish?           

LIBOR+0.5%                      10.7% fixed rate                                 10.7%                                       10.7%[pic 1]

                                         [pic 2][pic 3][pic 4][pic 5][pic 6]

[pic 7][pic 8][pic 9]

                                  (LIBOR – x)                                    LIBOR – x                                                  

BF Goodrich prefer floating-rate debt issue tied to LIBOR and swap interest

 Payments with European bank, because such debt is believed to have many potential buyers.

Rabobank prefer a fixed rate Eurobond issue with the swapping interest payments with US corporation.

1. How large must the discount (X) be to make this an attractive deal for Rabobank?

Payout of Rabobank is LIBOR – x, which should be less than the floating rate LIBOR +.25%. So x must be larger than -0.25% for Rabobank to benefit from the swap.

1. How large must the annual fee (F) be to make this an attractive deal for Morgan Guarantee?

F must be greater than 0 for Morgan to benefit from the swap.

1. How small must the combination for F and X be to make this an attractive deal for B. F. Goodrich?

To make the deal attractive, payout for BF Goodrich 11.2% + F + x must be less than 12.5%, where F+x should be less than 1.3%