Goodrich Case

As the steep recession of 1982 for Goodrich, it confronted to a dilemma of choosing a better asset financing deal that was financially secure. More specifically, as Exhibits 1 and 2 shows, both the earnings and cash flow had been severely affected, either its credit rating descended to a great extent. Hence, the firm had to seek a favorable method to adjust its interest options to gain the most satisfying deal. There were several financial factors needed to earnestly considered in terms of fixed-rate, floating liabilities, and assets. The interest rate swap was the most attractive one due to its high liquidity. Moreover, there were two firms involved in the type of a fixed for floating rate swap.

In order to gain $50 million to fund its financial requirement, Goodrich intent to borrow longer-term with fixed-rate money and obtain a short-term availability at a relatively low cost to compromise its future flexibility simultaneously. Obviously, long-term fixed-rate money should be excessively expensive for Goodrich to burden the financial pressure. There were two options for Goodrich to relieve the problem in terms of bank loan and market security. More specifically, Salomon Brothers could sell a B.F. Goodrich 8 year floating-rate note in the U.S. bond market while the Rabobank-Nederland could issue an 8-year fixed-rate bond in the Eurobond market. The B.F. Goodrich agreed to pay $5.5 million to Morgan Bank for 8 years equivalent to 11% coverage of fixed annual fee while Morgan Bank could pay Goodrich $50 million at floating rate for 8 years on LIBOR based rate on the same day. The two issuers executed a swap with the Morgan Bank as the intermediary guarantor to agree to serve as a passive conduit for the swap payments between the two principals. More specifically, according to the given formula, Goodrich paid $50 million with noncallable 8 years bond; semiannual payment of the LIBOR rate was equal to 8.75 % plus the 0.50%, 9.25% for 3 years on the floating