The Bf Goodrich-Rabobank Interest Rate Swap Case

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  • Topic: Bond, Interest rate swap, Floating rate note
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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 1000 agricultural cooperative banks, was proposed to syndicate a large fixed rate Eurobond issue with the ultimate intention of swapping interest payment with a US corporation, BF Goodrich.

According to the pair of bilateral swap agreements with the Morgan Guaranty Bank, intermediary guarantor, swap agreement included these provisions:

Morgan’s AAA rating lowered credit risk. Morgan received from BF one time fee of $125k and annual fee for each year Morgan’s AAA rating lowered credit risk. Morgan received from BF one time fee of $125k and annual fee for each year

MB=>BF
8 years of semiannual payments
$50M . (LIBOR-x)
x: discount rate
MB=>BF
8 years of semiannual payments
$50M . (LIBOR-x)
x: discount rate
MB=>Rabo
$5.5M once each year for 8 years to cover 10.7% fixed annual coupon of $50M raised MB=>Rabo
$5.5M once each year for 8 years to cover 10.7% fixed annual coupon of $50M raised Rabo=>MB
8 years of semiannual payments
$50M . (LIBOR-x)
x: discount rate
Rabo=>MB
8 years of semiannual payments
$50M . (LIBOR-x)
x: discount rate
BF=>MB
$5.5M once each year for 8 years to cover 10.7% fixed annual coupon of $50M raised BF=>MB
$5.5M once each year for 8 years to cover 10.7% fixed annual coupon of...
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