Regarding "Borrowing for Teddy Bears" (Capital, December 1984) with a low floater: Your readers should be informed that the real danger in low floaters is not what happens if the prime rate goes to 22%, but what happens if the securities can't be rolled over every 30 days. The investment firms make no guarantees. If remarketing can't be done, the investment firm calls the letter of credit, and the holder of the letter of credit calls you and demands payment.
Luckily, there are firms that will stand between you and the letter of credit and fund a loan at prime or prime plus two if such a situation arises. This standby arrangement costs a point or so a year, which changes the gap between the industrial revenue bonds and the low floater. In reality, the low floater is probably meant for the big guys who can afford the extra insurance costs needed for someone to stand between the holder of the line of credit and themselves.
INC. replies: There is the possibility of remarketing difficulty with low floaters, although the investment banker who did the Trudy Corp. deal claims that there have been no failures to date.
In case of such a problem, however, the underwriters would offer investors higher interest rates. If there are no willing investors, the letter of credit would take effect. In the unlikely event that this happens and the letter of credit is called, the borrower would be subject to a significant increase in its cost of funds.