- 64 -
Up-front payment 0.04 mm (0.17)mm
Net Present Value 222,586 88,323
Implied Funding Spread
Under LIBOR 10.39% 10.39%
1 The approximate calculations are: $222,586 savings
divided by $25 million in principal, spread over 2.3 year
duration of principal payments; $88,323 savings divided by
$9,831,661 in principal, spread over 2.3 year duration of
principal payments.
This analysis indicates that the source of the banks' expected
gains was Merrill's pricing of the Citicorp Notes and LIBOR Notes
for purposes of the contingent payment sale. These prices
reflect sizeable bid-side and ask-side spreads. Transaction
spreads generally tend to be wider for structured transactions
than for direct market transactions because structured
transactions are customized to meet the needs of the end users
and often incorporate a premium to the dealer for innovations
that competitors are unable to replicate. The spreads implied in
Merrill's pricing of the Citicorp Notes and LIBOR Notes
represented the costs of the financial engineering that the
contingent payment sale required. Accordingly, the costs were
charged to ACM. The banks acquired the Citicorp Notes at the bid
price and issued the LIBOR Notes at the ask price. The spreads
on these two instruments could have been expected, at the time of
the contingent payment sale, to result in the transfer of a total
of about $1.8 to $1.9 million in value from ACM to the banks.
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