LURGSHALL CO (MAR/JUN 19)

It is the same logic as per your other question on swaps. I assume that you have watched my free lecture on swaps and so realise that had they borrowed fixed and the swapped so as to end up borrowing floating then the overall cost to both parties would be higher and there would be no saving to be made. There is only an overall saving if they swap the way as in the examiners answer.