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FINANCE IN PRACTICE
❱ Each day at around 11 a.m. in London, a panel of
major banks provide estimates of the interest rate at
which they could borrow funds from another bank in
reasonable market size. They produce these estimates
for 7 maturities that range from overnight to one year.
In each case the top and bottom quarter of the estimates
are dropped, and the remainder are averaged to provide
the set of rates known as LIBOR. The rates most com-
monly quoted as LIBOR are for borrowing U.S. dollars,
but similar sets of LIBOR are also produced for four
other currencies—the euro, the Japanese yen, the pound
sterling, and the Swiss Franc. LIBOR rates are pub-
lished by the ICE Benchmark Administration (ICE).^45
Figure 24.5 plots the difference between the inter-
est rate on three-month Treasury bills and LIBOR. This
spread is known as the TED spread. For many years
the TED spread was typically less than 50 basis points
(.5%), but in 2008 it widened dramatically, at one point
reaching 360 basis points (3.6%). Suddenly the choice of
benchmark for bank loans began to be very important.LIBOR
◗ FIGURE 24.5
Month-end values for the spread
between the interest rate on
three-month Treasury bills and
LIBOR (the TED spread), December
2004 to December 2014.
Source: Federal Reserve Bank of St. Louis.Dec 04Jun 05Dec 05Jun 06Dec 06Jun 07Dec 07Jun 08Dec 08Jun 09Dec 09Jun 10Dec 10Jun 11Dec 11Jun 12Dec 12Jun 13Dec 13Jun 14Dec 140.00.51.01.52.02.53.03.54.0Percent(^45) In the case of euro deposits, the European Banking Federation calculates an alternative measure, known as Euribor. You can find
historical values for LIBOR at http://research.stlouisfed.org/fred2/series/TEDRATE and for Euribor at http://www.euribor.org.
(^46) For a standard loan to a blue-chip company the fee for arranging a syndicated loan may be as low as 10 basis points, while a com-
plex deal with a highly leveraged firm may carry a fee of up to 250 basis points. For good reviews of the syndicated loan market see
S. C. Miller, “A Guide to the Syndicated Loan Market,” Standard & Poor’s, September 2005 (www.standardandpoors.com); and
B. Gadanecz, “The Syndicated Loan Market: Structure, Development and Implications,” BIS Quarterly Review, December 2004,
pp. 75–89 (www.bis.org).
credit line among a syndicate of banks.^46 For example, in 2011 Chrysler needed to borrow
$7.5 billion to repay loans from the U.S. and Canadian governments. It did so by means of a
package of a $3.2 billion bond issue, a $3.0 billion term loan facility, and a $1.3 billion revolv-
ing credit facility. The package was arranged by Bank of America Merrill Lynch, Citibank,
Goldman Sachs, and Morgan Stanley. The term loan had a maturity of five to six years and
was priced at 4.75% above LIBOR. In addition, Chrysler was required to pay a commitment
fee of .75% on any unused portion of the revolving credit.
The syndicate arranger serves as underwriter to the loan. It prices the loan, markets it to
other banks, and may also guarantee to take on any unsold portion. The arranger’s first step
is to prepare an information memo that provides potential lenders with information on the
loan. The syndicate desk will then try to sound out the level of interest in the deal before the
loan is finally priced and marketed to interested buyers. If the borrower has good credit or if
the arranging bank has a particularly good reputation, the majority of the loan is likely to be