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To secure the participation of BOT and BFCE in the
contingent payment sale desired by ACM, Merrill's Swap Group
offered each of the banks a "structured transaction."14 The
structured transaction consisted of two swaps to be executed in
conjunction with the contingent payment sale, a basis swap
related to the asset that the banks would be purchasing and a
hedge swap related to the liability that they would be issuing to
finance the purchase. The banks' counterparty in these swaps was
Merrill Capital. Both sets of swaps were entered into on
November 27, 1989.
Under the basis swaps, BOT and BFCE were obligated to make
monthly payments to Merrill Capital at the 1-month commercial
paper rate plus 15 basis points on notional amounts of $125
million and $50 million, respectively. These payments were
equivalent to the interest that the banks received on the
Citicorp Notes. In exchange, Merrill Capital was required to
make monthly payments to the banks at a rate of 1-month LIBOR
plus 25 basis points on identical notional amounts. After
3 months the spread over LIBOR that Merrill Capital was required
to pay increased to 40 basis points and in the case of BOT, to
50 basis points after another month, unless on any payment date
14 In financial terminology, a "structured transaction" is
one that combines two or more financial instruments or
derivatives. Most structured transactions, like those in this
case, include at least one derivative.
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