Question

International Financing Strategies:

The Federal Republic of Brazil acquired much of its debt in the late 1970s and early 1980s through international syndicated loans. By 1980 the Brazilian government had borrowed so frequently from the markets that what was known as "Brazilian pricing" became standard for many such syndicated credits:

Principal US$ 150 million

Maturity 10 years

Base interest rate  LIBOR

Spread 1%

Syndication fees 1 1/2%

a. What would the actual loan proceeds from such a syndicated credit?

b. What would the effective annual cost of funds be for the first year if LIBOR happened to be 10% during this first year?

Answer 1

Part (a)

the actual loan proceeds from such a syndicated credit = Principal - Syndication fees = $ 150 mn - 1.5% = 150 x (1 - 1.5%) = $ 147.75 mn

Part (b)

Effective cost of fund = Interest / the actual loan proceed = (LIBOR + 1%) x Principal / Actual loan proceeds = (10% + 1%) x 150 / 147.75 = 11.17%