Disney Financing Case

3. How well off is the French Utility after the swap?

As most of ECU Eurobond issuers are European, and European sovereigns and state agencies, including the French Utility, were often perceived by the markets as borrowing ECU too frequently and wearing out their welcome among the retail purchasers of ECU bonds. So it seems that using a swap to achieve financing purpose is more favorable for French Utility.

The principal amounts of 80 Million ECU and 14,445.153 Million yen in the columns C and D in exhibit 7 are strictly notional. So we need to calculate the real value. See yen-Jan 95 maturity loan in Exhibit 8, the annual cost of Yen debt is 6.83%. Hence, the semi-annual cost rate is 3.3586%.

The present value of yen payments to French Utility=

483.226/(1+0.03586)1+483.226/(1+0.03586)2+…+ 1520.45/(1+0.03586)20

= 14,592 Million

This present value of yen benefits is equal to ECU 79.296 million at the current exchange rates. Thus, we can revise the French Utility’s swap flows of ECU as follows:

Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |

Cash Flow | 79.296 | (7.35) | (7.35) | (7.35) | (7.35) | (7.35) | (23.35) | (21.88) | (20.41) | (18.94) | (17.47) |

(Source: Exhibit 7 column C)

So the all-in cost of ECU debt after swap should be:

79.296 = 7.35/(1+r) + 7.35/(1+r)2 +…+ 17.47/(1+r)10

IRR=all-in cost = 9.35%

See ECU- Mar 95 maturity loan in Exhibit 8, the cost of ECU debt is 9.37%. The Savings for French Utility after swap is about 0.02%. Though the benefit is small, but it is better than nothing for French Utility. And the utility also can structure the swap flows to accomplish its objective of perfectly matching future yen payments on this loan and reducing its yen exposure.