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Merrill Capital elected to terminate the basis swaps and purchase
the Citicorp Notes from the banks at par.
The basis swaps served a risk management function for the
banks. The net cash flows resulting from the combination of the
Citicorp Notes with the basis swaps were tied to LIBOR, the index
in terms of which BOT and BFCE, like international banks
generally, conducted most of their business. The step-up
provisions were negotiated at the request of the banks and were
designed to give Merrill Capital a financial incentive to make
arrangements for resale of the notes as quickly as possible.
Merrill Capital would forgo the exercise of its call option only
in the event of a substantial decline in Citicorp's credit that
caused the value of the Citicorp Notes to fall by more than the
cost of paying the premium.
Under the hedge swaps, Merrill Capital was obligated to make
quarterly payments over 5 years equivalent to the LIBOR Note
payments that the banks were required to make to ACM. In return,
BOT agreed to pay the sum of $25 million in 20 equal quarterly
installments plus interest on the unpaid balance at a rate of
LIBOR minus 18.75 basis points. BFCE agreed to pay the sum of
$9,831,661 in 20 equal quarterly installments plus interest on
the unpaid balance at a rate of LIBOR minus 25 basis points. In
addition, there were two upfront payments: Merrill Capital paid
$35,000 to BOT, and BFCE paid $168,339 to Merrill Capital. Like
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