Swapping benefit

For both Globaldrive B and PPAFl the first layer of protection is excess spread in the transaction, which is the difference between (1) the income received from the pool of receivables, and (2) the coupon due under the notes/payments due to the swap counterparty plus a certain servicing fee. Excess spread that is not used to cover losses on the loans within a certain period is returned to the originator (i.e., excess spread benefits the transaction on a use it or lose it basis). 

One solution to this problem, of course, is for the company to enter into a 5-year interest rate swap on a notional principal of 1 million, agreeing to pay the fixed rate and receive the floating rate. In our illustration, the fixed rate might be 3%, in which case the company would effectively lock into paying the fixed rate of 3% per annum over the 5-year period. While this protects the company against higher interest rates, the company cannot benefit from lower rates, especially at the outset when rates are just 2%. 

In this way, an interest rate cap allows the borrowing company to benefit when interest rates are low, while protecting the company when interest rates are high. This is marvellous, as it provides the best of both worlds, but such a result does not come free As with other interest rate options, the company would have to pay an up-front premium to purchase the cap. In the example here, this up-front premium might be around 165 bp of the notional principal, i.e., 16,500, which is equivalent to around 35 bp per annum if this cost were spread over the lifetime of the cap. This caps the effective EURIBOR at around 3.35% rather than 3%. Contrast this with the interest rate swap, which does not involve an up-front payment, but penalizes the company with a higher initial interest rate instead. 

It was useful to show the basic features of an interest rate swap using quick calculations for the payments such as described above and then explaining how the parties to a swap either benefit or hurt when... 

The fixed-rate payer will receive the floating-rate payments. And these payments have a present value of 11,459,495. The present value of the payments that must be made by the fixed-rate payer is 9,473,390. Thus, the swap has a positive value for the fixed-rate payer equal to the difference in the two present values of 1,986,105. This is the value of the swap to the fixed-rate payer. Notice, when interest rates increase (as they did in the illustration analyzed), the fixed-rate payer benefits because the value of the swap increases. 

On the liability side, the primary benefit occurs at the super-senior level. In cash-funded instruments, the level of funding for AAA risk is typically in the range of 40-70 bps. By contrast, super-senior implied funding of the top 70-90% of a synthetic deal usually can be achieved at a level of 7 to 17 bps via swap. The probabilistic view that this risk is safer than AAA is usually lost where notes must be issued. This benefit can often be worth 40 bps across 70% of the capital structure. 

If the 5-year swap rate is above 10 percent in three months, after the company has taken out its loan, it will exercise the swaption. If the rate is below 10 percent, however, it will transact the swap in the normal way, and the swaption will expire worthless. The swaption thus enables a company to hedge against unfavorable movements in interest rates but also to gain from favorable ones. There is, of course, a cost associated with this benefit the swaption premium. 

Witco and Ciba had product swaps plus allied distribution agreements to enable each to concentrate on their individual technological expertise yet, at the same time, offer customers the benefit of one-stop shopping . 

The novelty of the MASLWR turbine generator plant system is in its factory fabrication and modularity. As mentioned in the previous part, the turbine generator module is similar to the condenser and reactor module in that its relative size and weight allows for it to be completely factory fabricated and shipped to the plant on rail or truck. Another benefit of the small scale of the turbine module is that it can be located inside the reactor building, helping consolidate the power cycle and reducing the threat of sabotage. It can also be swapped out for maintenance or repair without a loss to downtime. 

Stopping medication is also important, whether due to side effects, patient preference, lack of benefit or swapping to another drug. Find out ... 

---