Interest Rate Swaps: A Deal Between B.F. Goodrich and Rabobank

Code : INB0009

Year :

Industry : Investment Banking, Financial Services

Region : US

Teaching Note:Available

Structured Assignment :Not Available

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Abstract: The case study 'Interest Rate Swaps: A deal between B.F. Goodrich and Rabobank', discusses the first ever interest rate swap deal between two corporates – B.F. Goodrich (Goodrich) and Rabobank. The case study explains how Goodrich encountered financial problems at the beginning of the 1980s. After suffering a net loss of US$ 33 million, the company decided to borrow US$ 50 million as a long-term loan. However, with a deteriorating financial position and a BBB- rating, it was impossible for the company to get a long-term loan at favorable rates. Salomon Brothers (Salomon), an investment banker, suggested to Goodrich that it issue floating rate notes and then swap them with fixed rate financing.

At the same time, one of the leading European banks – Rabobank -- wanted to borrow the same amount in fixed rate Eurobonds. Salomon approached Rabobank and at last the bank agreed to the swap deal in principle. However, the bank voiced its concern over Goodrich’s low rating, which could expose the bank to a credit risk. It was at this juncture that Morgan Guaranty Bank (Morgan) came into the picture. Morgan acted as a swap dealer between Goodrich and Rabobank and executed two swap deals, one each with Goodrich and Rabobank for a one time initial fee and annual fees for 8 years. Morgan undertook to guarantee of payment in case of default by any party. At last, the swap deal was executed successfully.

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Pedagogical Objectives:

  • Explain the mechanism of interest rate swaps in the special context of the first interest rate swap deal between two corporates - Goodrich and Rabobank
  • Demonstrate the intricacies involved in swaps deals
  • Explain the advantages of interest rate swaps deals

    Keywords : Interest Rate Swaps, B.F. Goodrich Company, US Bond Market, Rabobank, Morgan Guaranty Bank, Salomon Brothers, Swap Deal, LIBOR, Noncallable Fixed Rate Eurobonds, Risk Management, Derivatives, Rating, Floating Rate Loan, Fixed Rate Loan

    Contents :
    » B.F. Goodrich Company
    » Volatile Market and Unstable Financial Position
    » Rabobank Nederland

    Case Introduction >>

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