Show what spread the BHP will pay

Reference no: EM133030406

Broken Hill Proprietary

Long discussion. Mr Goodyear asked Mr Castlemaine to look at four financing possibilities. 7 year floating rate. 7 year straight fixed rate. 7 year fixed rate via the swap and 20 year fixed rate. Mr Castlemaine went away and the next day worked out details of each package. (See Exhibits 5 and 6 for swap dealer quotes and Exhibit 7 for USS market interest rates) After a morning's work he rang Mr Goodyear and recommended 7 year fixed rate synthetic finance achieved by a simultaneous issue of a seven year floating rate note in USS and a swap. The transactions and fees were as follows:

1. The issue of a 7 year semiannual US550m Eurodollar FRN linked to LIBOR

2. The payment of semiannual fixed rate cash flows to the swap dealer

3. The receipt of semiannual LIBOR floating rate cash flows from the swap dealer

4. Payment of an upfront fee of 5625,000 to ANZ for arranging the FRN

5. Payment of an upfront fee of 5125.000 to ANZ for arranging the swap

Mr Goodyear indicated that he was happy. The FRN was issued on May 7th 1999 and the swap agreements signed.

BHP Case Study: Assignment Questions

1. Using information in Exhibits 1, 2 and 4, decide the credit rating for the BHP. The credit rating will have an impact on the interest rates and swap spread. Show the key ratios in one table and the credit rating you have assigned to the BHP.

2. Show what spread the BHP will pay for the interest rate swap and how this has been derived.

3. Show alternative sources of finance BHP could use and how do they compare to interest rate that you have arrived at via the interest rate swap without (1 slide) as well as after considering transaction costs (1 slide). Explain the reasons for BHP's borrowing preferences

4. Show how much savings, if any, BHP will be able to make if it used the swap.

5. If the dealer creates a simultaneous swap with another counter party, what risks do they face, if any?

Attachment:- Broken Hill Assignment.rar

Reference no: EM133030406

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