Columbia River Pulp Company Inc

CORP. received refinanced approval of its long term debt from Toronto Dominion lodge (AD marge) amounting to $ two hundred loiterion based on vagabond rate. The floating refer rate represents the significant danger that needs to be mitigated through hedging products. There were some hedging products that AD Bank offered to CORP., swaps, caps, or collars, or some combination? There were definite trade-offs between these hedging products In equipment casualty of flexibility, interest rate protection, and true cost. Andrew Theatre, Chairman of CORP., had to decide on the amounts and maturities of the various transaction hedging offered.Issue moving in Kraft Market pulp Is a truly global commodity, which prices changing quickly In reception to capacity changes, inventory levels, and purchase levels. While foodstuff alp is produced in about 25 countries, historically more than than two-thirds of world output has come from five northern countries the united States, Canada, Swe den, Finland, and Norway. One major change in the global pulp market was the mid sass launch of pulp futures markets . While these markets were not an warm success, there was enough trading volume to sustain at least market, the Pulped/ Finish Options Exchange.It was hoped that futures markets, widely apply to trade futures in commodity products such as copper, aluminum, sugar, and coffee would bring more price stableness to the pulp market and even out some of the extreme price fluctuations that have plagued the global market pulp Industry. Price levels for market pulp as shown below In 1978, CORP. had financed the original cost of the mill from a group of united States insurance companies. The insurance companies was in doubt about the quality of their loans. This was because of the additive operating losses over the 1982 1986 period which totaling $ 39. 1 million.CORP. was unable to meet the repayment schedule on the debt. So, in march 1988, CORP. approached Toronto Domi nion Bank (AD Bank) to refinance $200 million of its long term debt. On July 21 , 1988 CORP. received reedit approval from AD Bank Board. CORP. received rationalization financing a $200 million, seven year reducing, revolving term facility and a $25 million operating facility from the kinsperson of six international banks. The floating rate borrowing options and bank lending margins were shown below The use of floating rate debt to finance fixed assets represents significant risks If the interest rates increased.The risk can be showtime through interest rate swaps, caps, and collars. In order to partially engage ten Tolling rills rate on ten mans ten Dank syndicate had included a positive covenant in the assign agreement which effectively arced the company to lock in fixed rates of interest on its debt. This covenant stated the following within 90 days after closing, the borrower will arrange interest rate swaps or similar hedging arrangements so that a total of $100 million of debt has a term of at least three years and an interest rate not to exceed 12%.