You are the consumer staples analyst for a large corporate and investment bank. The banks management has committed to shareholders to lift the bank ROE from the current 5% to 8% within a year and to 10% within 2 years.

Your institution can borrow money at the following maturity and cost:

Overnight 0.10% . 1-month 0.20% 3-month 0.25% 6-month 0.50%

1-year 0.75% . 3-year 1.50% . 5-year 2.00% . 7-year 2.50% 10-year 3.0%

You are looking at 2 loan applications for $200M each from Foodco and Safeco, two companies you know and cover for years, both of which have an established relationship with your bank. Foodcos cost of borrowing in the market is UST +250 while Safecos UST+400. As Safeco is considered the riskier of the two, any loan towards Safeco will have to generate more loss reserves. Both loans will be senior secured and thus collateralized. Safeco pledges as collateral real estate holdings plus business receivables (50/50) while Foodco pledges delivery trucks plus $20M of cash deposits. The appraised value of the collateral covers the loan fully. For Foodco the loan reserve (based on its implied probability of default) is 30 basis points per annum while for Safeco is 60 basis points per annum. Both companies leak to you that they already have received bids from competitors in the neighborhood of 5.5% and 6.0% respectively for a 10yr loan. What do you do and why?