280 CHAPTER 7. MARKETS FOR CURRENCY SWAPS
Figure 7.5:Renault’s 1981 circus swapRenault BankersTrust Yamaichioperating
incomeFRN
portfolioRenault’susd
FRN holdersYamaichi’sjpy
fixbond holders?>jpyfix >jpyfixjpyfix
?< <
usdflo usdflousdflo7.4 Cross-Currency Swaps
The cross-currency swap, or circus swap, is a currency swap combined with an
interest rate swap (floating versus fixed rate), in the sense that the loans on which
the service schedules are based differ by currencyandtype of interest payment. An
early example is the Renault-Yamaichi swap already mentioned in Section 7.2.1.
The historic background for the swap is as follows:
- Renault, a French car producer, wanted to get rid of itsusdfloating rate debt,
and wanted to borrow fixed-ratejpyinstead. The snag was that, because of
Japanese regulations at the time, Renault was not permitted to borrow in the
Japanese market. - Simultaneously, Yamaichi Securities was being encouraged by Japan’s Ministry
of Finance to buyusdassets.^8 It could have bought, for instance, Renault’s
usdfloating rate notes but was unwilling to take the exchange risk.
With the help of Bankers Trust, an investment bank, Renault convinced Yamaichi
to borrow fixed-ratejpyand to buy floating-rateusdnotes of similar rating and
conditions as Renault’s notes. As illustrated in Figure 7.5, Yamaichi was to hand
over theusdservice income from theusdinvestment to Renault, who would use
the floating-rateusdinterest stream to service its own floating-rate notes. As com-
pensation, Renault undertook to service Yamaichi’s equivalent fixed-rate yen loan,
and pay a spread to both Bankers Trust and to Yamaichi.
The advantages of the swap to each party were:- Renault was able to access the jpycapital market and get rid of its usd
liability. (A more obvious solution would have been to borrowjpyand retire
(^8) Japan wanted to show it was doing its bit to help finance theusdeficit and also help “recycle
the Petrodollars”, a big issue after the second oil shock, early eighties.