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JTKS Ltd, AAA credit-rated, plans to take a loan of R920 million for 3 years and it is considering an interest rate swap deal with

JTKS Ltd, AAA credit-rated, plans to take a loan of R920 million for 3 years and it is considering an interest rate swap deal with a lower credit-rated company to reap the possible swap benefits. JTKS Ltd can borrow at fixed rate of 7.18% or at a floating rate of JIBAR plus 0.51%. JIBAR is currently 6.36%, but due to inflationary pressures, future interest rates are uncertain. A swap could be arranged using a bank as an intermediary. The bank would offset the swap risk with a counterparty, Siyenza Holdings, a lower credit-rated company that could borrow at fixed rate of 8.02% or at a floating rate of JIBAR plus 7.5%. The swap bank would charge a total fee of 0.1% per JIBAR. JTKS Ltd would require 65% of any arbitrage savings (after the payment of fees) from the swap deal because of its higher credit rating.

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