Posted: September 16th, 2017

CASE STUDY: BARCELONA BRASSERIES;

CASE STUDY: BARCELONA BRASSERIES;

CASE STUDY: BARCELONA BRASSERIES
Barcelona Brasseries S.L. is a restaurant chain of new concept ‘do it yourself’ brasseries owned by the Oriol family. They had 5 restaurants, in owned premises or long-term leasing. Given the recent decrease in price of commercial property, the family had recently acquired new locations across the city of Barcelona for a total of 1,000,000 euro to use as premises of new brasseries.
The company had requested a new loan (commercial mortgage) of 350,000 euro amortising over 10 years to convert and refurbish the newly acquired premises into the brasseries concept, paying a margin of 4% over 3M Euribor. The loan was guaranteed by existing properties for a survey value of 450,000 euros. The business also had outstanding additional borrowings of c. 400,000 euro (200,000 remaining maturity of 8 years and 200,000 for 5 years), both at 3% margin over 3M Euribor. The family has provided the debt repayment profile as per the table below. € Loan 1 Loan 2 Loan 3 Principal outstanding 350k 200k 200k Interest rate Floating Floating Floating Margin 4% 3% 3% Tenor (years) 10 8 5 Repayment Amortising Amortising Amortising Monthly payment 3,627 2,392 3,638 Annual repayment 43,524 28,704 43,656 – Capital 27,774 21,704 36,656 – Interest 15,750 7,000 7,000
The most recent accounts for Barcelona Brasseries S.L. show an EBITDA of 167,880 euros p.a. and net profit of 132,000 euro p.a. Dividends of c. 120,000 euros had been paid to partly finance the family lifestyle.
In one of the casual meetings, the family’s private banker has recently proposed the possibility to protect the business from interest rate fluctuations through derivatives, and they have decided to appoint you as an independent adviser to discuss whether protection makes sense in the current economic environment and if so, what potential strategies they could use to do so.
From the ECB Monthly Bulletin, you have obtained the following information:
“The one-month, three-month, six-month and twelve-month EURIBOR stood at 0.22%, 0.29%, 0.39% and 0.55% respectively. The spread between the twelve-month and one-month EURIBOR – an indicator of the slope of the money market yield curve – declined marginally, by 2 basis points, to stand at 33 basis points on 5 February”.
In addition, the family banker has provided the following information:
Euribor 3 Month Swap rate*: 1%
Cap rate*:
? 0.5% – premium: 85,000 euros
? 1% – premium: 55,000 euros
? 1.5% – premium: 40,000 euros
? 2% – premium: 35,000 euros
? 2.5% – premium: 20,000 euros
? 3% – premium: 10,000 euros
Floor rates*:
? 1% ( less 40,000 euros)
? 1.5% (less 30,000 euros)
? 2% (less 20,000 euros)
*Assume the above details remain constant for any notional amount hedged. Assume that increasing tenors result in increased rates and costs of protection by a certain arbitrary amount.
PREPARE A REPORT FOR THE FAMILY PROVIDING DETAILS OF:
1) WHETHER HEDGING INTEREST RATES, AS SUGGESTED BY THE PRIVATE BANKER, WOULD MAKE SENSE GIVEN THE EXISTING ECONOMIC ENVIRONMENT
2) HOW DIFFERENT INTEREST RATE HEDING STRATEGIES SUCH AS PRODUCTS (SWAP, CAP, OR COLLAR) CAN HELP THE FAMILY.
3) DESIGN AND RECOMMEND AN AD-HOC SOLUTION BASED ON THE FOLLOWING FACTORS:
a. Notional amount
b. Time of protection (tenor of instrument(s))
c. Products / strategies
d. Protection rate
4) EXPLAIN HOW WOULD YOU SELL THE SOLUTION TO THE FAMILY

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