Case Study - the B.F. Goodrich-Rabobank Interest Rate Swap

The B.F. Goodrich-Rabobank Interest Rate Swap

On Monday, March 7, 1983, B. F. Goodrich and Rabobank simultaneously executed two

financings and an interest rate swap, the net effect of which was 1) to provide U.S. investors with an

attractive and unique LIBOR-based floating-rate note, 2) to provide Eurobond market investors with

an attractive AAA fixed-rate bond, 3) to raise $50 million of floating-rate Eurodollar financing for

Rabobank, and 4) to raise $50 million of fixed-rate, 8-year financing for Goodrich. It was apparently

one of those rare and satisfying financial arrangements where everyone believed he or she had

emerged a clear winner.

The Company

B.F. Goodrich was a diversified manufacturer of tires and related rubber products, chemical,

and plastics, and a wide variety of industrial products, components, and systems. Among other

business, it was the fourth-largest U.S. producer of tires and the largest U.S. producer of polyvinyl

chloride (PVC) resins and compounds.

The steep recession of 1982 had caused significant financial difficulties for Goodrich, as it had

for most other companies in comparable businesses. Exhibits 1 and 2 show recent balance sheets and

income statements for the company. Goodrich's earnings and cash flow had been adversely affected,

its credit rating had been downgraded from BBB to BBB-, and it was about ready to announce the $33

million loss for 1982 shown in Exhibit 2.

The Financing Problem

Early in 1983, Goodrich needed $50 million to fund its ongoing financial needs. In theory, it

could have merely borrowed $50 million more from its committed bank lines, with a borrowing cost

slightly above the prime rate (plus, of course, compensating balances). But it was reluctant to

consume a substantial part of its remaining short-term availability under those lines or, for that

matter, to compromise its future flexibility by borrowing in the short-intermediate-term (2-5 years)

range. It wanted to borrow longer-term, in either the 8-10 year range or perhaps in the 30-year range,

and it wanted fixed-rate money.