Case : Galaxy Electricals

Galaxy Electricals

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Case : Galaxy Electricals

Case Focus : Euro Loan syndication—process of negotiation and pricing

Major elements of pricing

• Front-end Fee

• Commitment Fee

• Spread over base rate ( Libor in this case)

Let us now look at how the bids evolved

Galaxy Electricals

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Case : Galaxy Electricals

Bid 1 ( Bank )

Bid 2 ( Galaxy)

Bid 3 ( Bank)

Bid 4 ( Galaxy)

Commitment fee 0.25024 0.12512 0.25024 0.12512

Front-end Fee 0.19490 0.13923 0.19490 0.16708

Spread over Libor 1.75000 1.5000 1.62500 1.62500

Total spread 2.19510 1.76430 2.07010 1.91720

Questions

1 What do you make of the trend in bids 1 to 4 ? Do you see any areas of agreement between the bank and the company ?

2 What would you recommend about bid 5, due from the bank?

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Case : Galaxy Electricals

Question

• Can you guess what kind of bid finally clinched the deal?

Galaxy Electricals

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Case : Galaxy Electricals

Here is the bid that clinched the deal:

Equivalent spread

1 Commitment fee (0.375) 0.18768

2 Retro-active Commitment fee ( 0.125) 0.04716

3 Front-end fee ( 0.77) 0.17124

4 Spread over Libor ( 1.625 ) 1.62500

5 Total spread ( Sigma 1 : 4 ) 2.03198

Question

What do you think of this bid , particularly the idea of retro-active commitment fee ?

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Case : Galaxy Electricals

QuestionWhat is the borrower (Galaxy

Electricals in this case) worried about?

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Case : Galaxy Electricals

The borrower is worried about :• Currency Risk• Lowest all-in cost

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Case : Galaxy Electricals

QuestionWhat is the lender ( Midland Bank in

this case) worried about ?

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Galaxy Electricals

The lender is worried about : • Credit risk• Country risk• Sustainable all-in spread over base rate

An important point to remember:• In euro loans, the spread over LIBOR reflects not only credit risk of the borrower but also country risk. Galaxy Electricals

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Case : Galaxy Electricals

Question• What do you think about the profitability

of such loans to the lending bank? What sort of spread over the base rate makes sense?

In answering the above question, assume that the bank has an ROI target of 15%.

Galaxy Electricals

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Case : Galaxy Electricals

Assume that

the bank has an ROI target of 15%

Liabilities $ Millions Assets $ Millions

Deposits 20 Loans

Capital 1

What sort of spread over Libor is needed to make the loan profitable to the bank?

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12Bank needs to earn

$ 150,000 On its capital of $ 1 million

By lending its deposit of $ 20

million

Bank needs to charge a spread of

0.75% ( = 150000/20

Mns.)

Galaxy Electricals

13Data for select Indian banks ( Purely indicative. To be updated)

S .No.

Bank Base Rate (%)

BPLR (%)

1 SBI 10.00 14.75

2 ICICI Bank 10.00 18.75

3 PNB 10.75 14.25

4 Bank of Baroda 10.75 15.00

5 HDFC Bank 10.00 18.50

6 Axis Bank 10.00 17.75

7 Canara Bank 10.75 15.00

8 Bank of India 10.75 15.00

9 Union Bank of India 10.65 15.50Question : What do your make of the above table ?