Consider a multinational corporation who wishes to borrow a $1.25 billion jumbo
ID: 2615485 • Letter: C
Question
Consider a multinational corporation who wishes to borrow a $1.25 billion jumbo loan in the Eurodollar market at LIBOR plus 1.25% over a 7-year period with an upfront fee of 1.25% (origination fee). The lead arranger bank Goldman Sachs retains $100 million in its book and spreads the risk and reward proportionally among the sub-participants as illustrated in the table. The arranger bank books $4.125 million arranger fee of the total upfront fee of $15.625 million collected from the borrower as shown in the table Banks Fee 12 Sub-participants 10 Sub-participants 12 Sub-participants Arranger Amt of Capital Funded Fee Income $600 million $310 million $240 million $100 million $1.25 billion 01 $6,000,000 $3,100,000 $2,400,000 $4,125,000 $15,625,000 01 01 04125 Total 1.25% 1) Suppose 1-year LIBOR by the end of the first year is equal to 3.75%. How much interest is due to Goldman Sachs by the borrower at the end of the 2nd year? 2) The $100 million loan on the Goldman Sachs book is 100% risk-weighted, requiring a minimum 8% regulatory capital by the bank regulator. (Goldman Sachs has to put up $8 million of its own capital and borrow remaining $92 million in the interbank market at the cost of 1-year LIBOR.) What is the return on equity for Goldman Sachs for funding $100 million of the syndication loan? 3) One of the sub-participating banks is a UAE bank who funded $24 million of the syndication loan The regulator in the UAE requires 15% regulatory capital. What is the return on equity for this bank at the end of the 2nd year provided that his bank has funding cost at the rate of LIBOR 25 bps (100 basis points is equal to 1%)? 4) Describe how the borrower in the above syndication loan will manage its exposure to interest rate risk.Explanation / Answer
Answer 1)
As Libor rate at end of1st year = 3.75%
So, effective Interest rate for 2nd year = Libor+ 1.25 = 5%
Total interest due to Goldman Sach at end of 2nd year = $ 100 miilion * 5% = $ 5 million
Answer 2)
Return of own capital( equity) = (Interest earned - interest paid ) / own capital
Total loan = $ 100 million , own capital = $ 8 Million , Borrowed fund = $ 92 million
Interest earned = LIBOR+ 1.25 % , Interest Paid = LIBOR
Total Interest Paid = $ 92 * 3.75% = $ 3.45
Total Interest earned = $ 100 * 5% = $ 5
Return on capital = (5-3.45) /8 =0.19375 = 19.375%
Answer3)
very much Similar to question 2)
Answer 4)
Hedging of interest rate is the best way for borrower to manage interest rate risk in the eurodollor market .The hedgeing can be done by use of future or any other derivative contract in the currency or and money market market .Some major techniques are :
FORWARD RATE AGREEMENTS (FRA)
Allow a borrower to borrow funds as though it had agreed a rate which will apply for a period of time
Total loan 24 Own fund 3.6 Leveraged Fund 20.4 Interest rate paid LIBOR +0.25 4% Interest ratereceived LIBOR+1.25% 5% Total interest received 1.2 Total interest paid 0.816 Return on Capital 10.667%Related Questions
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