A group of European banks, led by BNP-Paribas, are offering an emergency loan to

Question

A group of European banks, led by BNP-Paribas, are offering an emergency loan to the government of Greece, under the following terms:

Principal amount: Maturity:
Interest Rate: Syndication fee:

EUR 5 Billion (“bullet” repayment at loan maturity) 1 year
1 Month Libor + 2.00% (interest paid in arrears) 1.25% of the loan, payable upfront.

Assume a 360-day year (12x 30 days).

a) What is the net amount available to the Greek government?

b) If the 1 Month Libor rate stays fixed at 2.5% throughout the entire period of the loan, what will

be the Effective Annualized Rate (EAR) of this loan to the Greek government (considering all

fees)?

c) Assume that BNP-Paribas’s share of the entire loan is 15% (i.e., € 750 Million), but that, as the

lead bank, it receives 30% of the entire syndication fee. What will be BNP-Paribas’s actual margin (spread) expressed as a % above Libor on its portion of the loan (considering all fees)?

Explanation / Answer

a) Net Amount Available to Greek Government:   

Principal Amount= 5,000,000,000

Less: Syndication Fee (1.25% of % Billion) =62,500,000

Net Amount = 4,937,500,000

Or 4.9375 Billion

b) Effective Annualized Rate of Loan to the Greek Government

                        Interest Rate = 1 Month Libor + 2 = 2.5 + 2 = 4.5%

                 EAR = Interest Rate + Syndication Fees = 4.5 + 1.25 = 5.75%

c) BNP-Paribas’s Actual Margin:

BNP-Paribas’s share of entire loan = 750,000,000

Interest to be received = 750,000,000 * 4.5% = 33,750,000

Add: Share of Syndication fees (62,500,000*30%) = 18,750,000

Total Gain = 52,500,000

% = (52,500,000/ 750,000,000)*100 = 7%

Spread = 7 – 2.5 = 4.5%

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