Submitted by: Submitted by madmax
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Pages: 5
Category: Business and Industry
Date Submitted: 10/09/2012 02:10 PM
B.F. Goodrich – Rabobank Interest Rate Swap Case Brief
As the CFO of B.F. Goodrich, I would recommend to the Board of Directors to agree to participate in an interest rate swap with Rabobank. In order to convince the Board it is important to determine what the benefits are to each party, and to address the risks of agreeing to the swap, seeing that swaps are a new concept during this time period. Secondly, as B.F. Goodrich we need to ensure that we are receiving a net positive payoff from this deal, and ensure that all parties are satisfied with positives payoffs as well, or the agreement will fall through and we will be unable to reap the benefits of a swap agreement.
Looking at exhibit one, Rabobank has a competitive advantage in borrowing in fixed rates at 10.7%, while B.F. Goodrich will borrow at a floating rate of Libor + 0.5%. Therefore, the quality spread differential amounts to 1.55%, which can be divided in a way that all parties are satisfied. By swapping with Rabobank, B.F. Goodrich will be able to benefit from the advantage Rabobank has in fixed interest rates in their market, allowing them to obtain an equivalent advantage in their home market, which they never had access to. While Rabobank will able to reap better floating rates, which they never had access to before. This swap will allow each company to exploit their privileged access in one market to produce interest rate savings in another. It also allows the companies to take advantage of the global markets more efficiently because it’s bringing together Rabobank and B.F. Goodrich, who each have different advantages in different markets.
As a result, the interest rate swap should be pursued because it benefits all parties involved. B.F. Goodrich needs $50 million dollars to fund its ongoing financial needs, and wants to do so by borrowing long-term. However, they have run into financial problems and had recently lost their BBB credit rating, and were downgraded to BBB-. As a result...