Case 14-04 Spartan Casino On January 1, 2009, Spartan Casino (Spartan or the â??Companyâ?) executed

Case 14-04
Spartan Casino
On January 1, 2009, Spartan Casino (Spartan or the “Companyâ€) executed a $250 million
revolving credit facility with Uber Bank AG (Uber). The rate
of interest on the credit
facility is USD LIBOR + 650 basis points (bps) for the first
two years. Spartan has a
choice of 1M-, 3M-, and 6M-USD LIBOR each time it draws down
on the credit facility.
Interest payments on the borrowing are settled on the basis
of the LIBOR tenor selected
(e.g., if Spartan selects three-month USD LIBOR as the
referenced rate, interest is due
every three months on that borrowing). Principal borrowed is
typically due five years
from the drawdown date, but each drawdown will contain a
specified maturity date.
Upon finalizing the terms of the credit facility, Spartan
immediately drew down $50
million on January 1, 2009, at 3M-USD-LIBOR + 650 bps, due
on December 31, 2013.
Spartan’s
interest rate risk management policy requires that at least 75 percent of its
outstanding debt be fixed rate (either directly or
indirectly through the use of derivatives).
In order to maintain compliance with its policy, Spartan
entered into an interest rate swap
to “convert†the borrowing from variable
to fixed interest.
The Company designated the interest rate swap as a hedge of
forecasted interested
payments associated with changes in 3M-USD-LIBOR on the
first previously unhedged
$50 million of 3M-USD-LIBOR based debt. The Company has no
other debt.
Specifically, Spartan executed the following interest rate
swap transaction:
Interest Rate Swap 1:
• Notional
amount: $50 million
• Trade date:
January 1, 2009
• Effective
date: January 1, 2009
• Maturity
date: December 31, 2013
• Pay leg:
8.0 percent
• Receive
leg: 3M-USD-LIBOR + 650 bps
• Initial
LIBOR: 1.00 percent
• Payment
dates: Each March 31, June 30, September 30, and December 31
• Variable
reset dates: Quarterly, each March 31, June 30, September 30, and
December 31
Six months later, on July 1, 2009, Spartan needed to again
raise capital to continue
construction on its new City Focus hotel and high-end retail
development. The Company
borrowed another $75 million at 3M-USD-LIBOR + 650 bps, due
on JuneSimilar to the first drawdown, Spartan executed a second interest rate
swap with the
following terms:
Interest Rate Swap 2:
• Notional
amount: $75 million
• Trade date:
July 1, 2009
• Effective
date: July 1, 2009
• Maturity
date: June 30, 2014
• Pay leg:
8.5 percent
• Receive
leg: 3M-USD-LIBOR + 650 bps
• Initial
LIBOR: 1.25 percent
• Payment
dates: Each September 30, December 31, March 31, and June 30
• Variable
reset dates: Quarterly, each September 30, December 31, March 31,
and June 30
Spartan designated this interest rate swap as a hedge of
forecasted interested payments
associated with changes in 3M-USD-LIBOR on the first
previously unhedged $75
million of 3M-USD-LIBOR based debt. 30, 2014.
After two years, Spartan continues to pay interest on the
$125 million borrowings on
time, in addition to settling the interest rate swap each
quarter. However, on December
31, 2010, Spartan decides to pay $25 million of the $125
million it has borrowed from
Uber to date. The debt is prepayable without penalty. The
Company makes no other
changes to its capital structure of derivatives.

Required:
1. Define the type of hedge that Spartan would need to
designate. In other words, are
these cash flow hedges, fair value hedges, or net investment
hedges?
2. Identify the criteria that Spartan would need to meet and
document to ensure the
interest rate swaps achieve hedge accounting that is based
on the provisions of ASC
815, Derivatives and Hedging Activities.
3. Determine the appropriate journal entries to account for
the two hedging relationships
for the year ended December 31, 2009. Use the details below
to aid in entry
determination, and assume that both hedging relationships
are perfectly effective.

March 31, 2009 1.00% (reset 12/31) $250,000 n/a
June 30, 2009 1.10% (reset 03/31) $750,000 n/a
September 30, 2009 1.25% (reset 06/30) $1,200,000 $900,000
December 31, 2009 1.18% (reset 09/30) $1,100,000 $775,000
* Note that the fair
values are after the quarterly settlements are made.
4. Briefly describe the implications of Spartan paying down
$25 million of the $125
million total borrowing on the two hedging relationships.

 

Looking for a Similar Assignment? Let us take care of your classwork while you enjoy your free time! All papers are written from scratch and are 100% Original. Try us today! Use Code FREE15