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Kitno


Total Posts: 462
Joined: Mar 2005
 
Posted: 2020-02-06 23:09
I saw a spreadsheet recently that was put together by a good bank. It was a model for a significant infrastructure project (that would largely be financed by debt) for one of the bank's low-medium credit quality investment grade clients...say BBB/BBB+. The client (project) would be paying fixed on debt interest payments; hence a swap vs the loan issued against LIBOR.

The bank had included upfront fees for the loan arrangement/syndication as a line item as a % of loan notional.

Separately, for the loan financing costs it listed: LIBOR rate, "swap cost" and margin.
Now, LIBOR was X, swap cost 2.5% and margin 7.5%. Margin is clear, given the project - no comments please on the credit risk here as it's EM.

What I found interesting was the "swap cost". I thought it's
A) Fixed to float "charge" (the tenor spot rate) above 3m LIBOR spot (obviously not a "swap cost" but maybe a crappy label for the client)
B) Internal bank counterparty credit risk charge for the swap over 10y life of the loan (swap).
C) Taking the fucking piss P&L.

I am in a quandary as to how much it is B or C (or rather the proportions of a mix). I've never come across an internal cpty credit cost that high on a swap and I've dealt with some shit counterparties. Thoughts?


HEY! What about the guy who first landed on the moon? He said "one small step for man". I'd just have said "OMG I'm on the moon!"

NeroTulip


Total Posts: 1062
Joined: May 2004
 
Posted: 2020-02-07 06:38
I suspect it is A: the difference between the fixed rate the client pays and spot 3m Libor. You and I know it is not a cost, but many people are unable to imagine that Libor can move, even when doing a swap to hedge against these very moves!

"Earth: some bacteria and basic life forms, no sign of intelligent life" (Message from a type III civilization probe sent to the solar system circa 2016)

NeroTulip


Total Posts: 1062
Joined: May 2004
 
Posted: 2020-02-07 06:38
I suspect it is A: the difference between the fixed rate the client pays and spot 3m Libor. You and I know it is not a cost, but many people are unable to imagine that Libor can move, even when doing a swap to hedge against these very moves!

"Earth: some bacteria and basic life forms, no sign of intelligent life" (Message from a type III civilization probe sent to the solar system circa 2016)

Kitno


Total Posts: 462
Joined: Mar 2005
 
Posted: 2020-02-07 21:41
NeroTulip, I would agree entirely if it were not for 2.50% however the other variable is that these could be dummy numbers. That said it was presented to a client to manage their funding cost expectations. Frankly I expect better with a full breakdown.

It was put together in the last 4 months so I could understand 1.75% but not 2.50%. The generous side of me says A+B.

Also they've coded a lot of superfluous VBA in this sheet (i.e. if you knew a modicum of how to knit formulae together you'd never have coded VBA).

I guess I just see the best in bankers. Head against Wall

HEY! What about the guy who first landed on the moon? He said "one small step for man". I'd just have said "OMG I'm on the moon!"

nikol


Total Posts: 993
Joined: Jun 2005
 
Posted: 2020-02-07 23:02
If client can pay 10% for the debt whatever it is he will (his calculation is "50% is my profit, I pay 10% and still get in money"). The rest is a skill of bank's sales how they pack it for taxes, because rates are not taxable, fees and margins are. And, yes, credit risk is accounted as cost into EL/CVA buffers.

ronin


Total Posts: 550
Joined: May 2006
 
Posted: 2020-02-11 21:33
It's A+B I would think.

If par swap rate is 1.75 and credit risk is 750, the credit charge on the swap is 10-15 bp running.

If it's a presentation, it is indicative pricing, not firm pricing. So they put enough padding to not have to worsen at trade time. They could even improve if they had to.

And yeah, there is some C. If it's linked to a loan, the client is captive. He can't go somewhere else for the swap.

Of course they could have been quoting the loan below cost to win the bid, then have to make it back on the swap once the client is captive.

Just ask. They will probably tell you, if you ask politely.

"There is a SIX am?" -- Arthur
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