Description
A vice-president of a hedge fund must determine whether his fund will take a 5 per cent equity stake in Premier Foods Plc (Premier). At the time of the case, Premier, a publicly listed U.K. food and beverage company, was heavily indebted following a period of aggressive acquisition growth. Moreover, Premier had issued interest rate swaps on the majority of its debt. As the financial crisis unraveled, interest rates dramatically declined, and Premier’s interest rate swaps appeared to be further draining the firm. Against this backdrop, the case sets its ultimate objective, which is to simulate the vice-president’s analysis of the firm’s debt, interest rate swaps, caps and floors before deciding whether to invest in Premier.
Learning Objective
This case is best suited for an investments, fixed income securities or options course. It provides an opportunity to value a straightforward fixed rate swap as well as related interest rate caps and floors. Moreover, it provides a tangible context to appreciate firms' motivation to issue swaps while simultaneously highlighting the potential negative effect these derivative securities can have on firm value. It also provides a context in which to discuss how the LIBOR rate fixing scandal could have negatively affected a variety of participants in the market place.