- 69 - on March 1, 1990, when the opportunity to do so first arises: At the inception of the swap, the prospect of a decline in BFCE's credit sufficient to warrant retention of the option at the large cost that this would impose was highly unlikely. As in the structured transaction that Merrill designed for the other two banks, Sparekassen could expect to lose money on the swap; the source of its gain is the bid-side spread implied in Merrill's pricing of the LIBOR Notes. The transaction pricing resulted in the transfer from Southampton to the bank of more than $200,000 in value, most of which would ultimately enure to the benefit of Merrill Capital. See diagram 2 supra p. 67. By agreements among BFCE, Sparekassen and Merrill Capital, the BFCE LIBOR Notes and the two hedge swaps related to them were terminated during 1990. Merrill arranged another hedge swap for BFCE in conjunction with the bank's purchase of the BOT LIBOR Notes from ACM for $10,961,581 on December 17, 1991. The structure and function of this swap were for the most part identical with those of the hedge swap between Merrill Capital and Sparekassen. BFCE agreed to pay Merrill Capital amounts equal to the flows it was entitled to receive under the BOT Notes. Merrill Capital agreed to make 12 equal quarterly payments aggregating $10,961,581, together with interest on the unpaid balance at LIBOR plus 35 basis points. The interest rate was stepped up after the first year unless Merrill elected to terminate the swap and acquire thePage: Previous 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 Next
Last modified: May 25, 2011