Treasury, Foreign Exchange, and Trade Finance
- Pages: 5
- Word count: 1049
- Category: Finance
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Order NowInterest Rate Swaps or Hedging Arrangements must b made within 90 days of closing.
A total of $100 million must have a term of at least three years and an interest rate not to exceed 12 percent.
Note: term of at least 3 years is insurance for the lender
Scheduled Repayment (in 28 quarterly installments beginning first quarter after 7-21-88):
Installments – 1-20 @ 1.75% each
Installments – 21-27 @ 5.00% each
Final Installment – 28 @ 30%
Prepay is allowed.
Estimated interest rate and inflation forecast:
- 38 low to 7.96 high
- 0 low to 9.0 high
- 5 low to 9.0 high
- 5 low to 8.6 high
- 7 low to 9.0 high
- 2 low to 10.0 high
CRP estimates that it will be able to prepay between $11 and $23 million in each of the next 7 years. Scheduled payments are approximately $14 million per year.
SWAPS
Total Annual Interest
[P(FR)(8)] = Total Annual Interest
Total Repayment
[P(FR)(8) + P] = Total Repayment
- 2 year @ 8.36% Treasury Rate and 9.11% Swap Rate = 245,497,500 based on notional amount of $225,000,000 (Recapitalization Amount Financed)
Total Annual Interest = $163,980,000
Total Interest and Principal Repayment = $388,898,000
- 3 year @ 8.43% Treasury Rate and 9.31% Swap Rate = 245,947,500
Amount Issued by Toronto Dominion: $225,000,000
Total Annual Interest = $251,370,000
Total Interest and Repayment: $476,370,000
Installment System:
1-20 @ 1.75% = $8,336,475
21.27 @ 5% = $23,818,500
28 (1) @ 30% = $142,911,000
- 4 year @ 8.55% Treasury Rate and 9.44% Swap Rate = $246,240,000
Amount Issued by Toronto Dominion: $225,000,000
Total Annual Interest: $371,920,896
Total Interest and Principal Repayment: $596,920,896
Installment System:
1-20 @ 1.75% = $10,446,115.68
21-27 @ 5% = $29,846,044.8
28 (1) @ 30% = $179,076,268.8
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- 5 year @ 8.71% Treasury Rate and 9.57% Swap Rate = 246,532,500
Amount Issued by Toronto Dominion: $225,000,000
Total Annual Interest: $430,650,000
Total Interest and Principal Repayment: $677,182,500
Installment System:
1-20 @ 1.75% = $11,850,693.75
21-27 @. = $33,859,125
28 (1)@ = $203,154,750
CAPS
Caps are not an option to consider. The projected interest rates are not of concern. The interest rate and inflation forecast for the next six years is not projected to go above 10.0% and only be at 10% one time. The cost incurred in obtaining the Caps would be unfruitful due to projections.
Collars
Background:
Option A Option B
Cap Rate: 11.00% Cap Rate: 10.25%
Floor Rate: 8.375% Floor Rate: 8.75%
Up-Front Fee: $0 Up-Front Fee: $0
Maturity: 3 years Maturity: 3 years
Maximum Option A
Cap Rate 11.00%
+LIBOR (S&R) 2.00
+Amortized Up-Front $0
All-In Rate 13.00%
Minimum Option A
Floor Rate 8.375%
+LIBOR (S&R) 2.00
+Amortized Up-Front $0
All-IN Rate 10.375%
Option A is automatically ruled out because the All-In Rate is above 12% and it is the goal of the company to stay below this rate.
Collars (cont.)
Maximum Option B
Cap Rate 10.25%
+LIBOR (S&R) 2.00
+Amortized Up-Front $0
All-In Rate 12.25%
Minimum Option B
Floor Rate 8.75%
+LIBOR (S&R) 2.00
+Amortized Up-Front $0
All-IN Rate 10.75%
Collars (cont.)
Option B:
Max. (All-In Rate) (P) = 12.25% (225,000,000) = 330,750,000 = 555,750,000 Repayment (principal and interest)
Min. (All-In Rate) (P) = 10.75% (225,000,000) = 290,250,000 = 515,250,000 Repayment (principal and interest)
Recommendations
3 Year Swap Plan
- The min. repayment (principal and interest on the collars option B is higher than the 3 Year Swap Plan).
- The interest on Option A in the Collars Strategies is greater than 12%.
- The 3 year SWAP option can be paid off early through maximizing use of the prepay option.
Scheduled Payments (Principal and Interest) Estimated Pre-Pay Estimated
1-20 @ 1.75% = $8,336,475 17,000,000 (340,000,000)
21-27 @ 5% = $23,818,500 23,000,000 (138,000,000)
28 (1) @ 30% = $142,911,000 -0-
Total Interest and Repayment: $476,370,000
CRP estimates that it will be able to prepay between $11 and $23 million in each of the next 7 years. Scheduled payments are approximately $14 million per year.
Pro’s and Con’s of Each Instrument:
Swap
- Advantage – no risk to worry about with the interest rates…they are locked in when the agreement is made. These have become very popular.
- Major Disadvantage – Someone defaulting on an agreement when a situation looks a little better on the other side with interest rates compared to what they are locked in for the term of their swap agreement.
Cap
- Advantage – Provides insurance when interest rates can fluctuate in the market. There is a CAP on what your interest rate will be, thus you are insured against fluctuations in the market.
- Advantage – Offers benefits to both the lender and the contracting party.
- Disadvantage – The price paid for the insurance against fluctuations may not be offset if there are not fluctuations to the company’s advantage.
Collars
- Advantage – Provides the benefit of the Cap protection with no fee.
- Disadvantage – Once the set rate is agreed upon and should the market take sharp downhill climbs…then the company can end up paying a lot of money out in interest lost back to the lender. Could have the potential to be disastrous if the company is not financially prepared for the risks associated with this option.
