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International
Financial Relations
Prof. Ian GIDDY
Stern School of Business
New York University
Schedule:
Monday: Currency Systems & Markets
Tuesday: Bank Financing, Bonds &
Project Financing
Wednesday: Equity Financing &
Valuation
Thursday: Structured Financing & LBO
Friday: Financial Restructuring, M&A
Monday:
Exchange-Rate
Systems & Markets
Global Financial Architecture
Exchange Rate System?
Fixed
Floating
…or what?
Copyright ©2003 Ian H. Giddy
Introduction 4
Cap des Biches:
Choices for GTI-Dakar






Renegotiate the $30 million loan, replacing it with a loan
denominated in Euros
Keep the USD loan in place, but enter into a 6-year
currency swap to effectively convert GTI's payments into
Euros.
Hedge the dollar-Euro risk by buying dollars forward,
with rolling 3-month forward contracts
Hedge against a possible devaluation of the CFA franc,
by selling francs in the 3-month forward market.
Leave the dollar loan unhedged, and pass the cost of
any foreign exchange losses on to Senelac, the buyer of
GTI's power
Do nothing now but watch the situation carefully and
hedge if the risk becomes too great.
Copyright ©2003 Ian H. Giddy
Introduction 5
The International Money Markets
Source: ft.com
Copyright ©2003 Ian H. Giddy
Introduction 6
Foreign Exchange Quotations
Spot
Copyright ©2003 Ian H. Giddy
Forward points
Introduction 7
Ecobank
Cost of GBP: 3 19/32 = 3.5938%
 Cost of EUR, hedged into GBP:
[1.4282(1+2 17/32/400)/1.4224-1]4
= 4.1641

Copyright ©2003 Ian H. Giddy
Introduction 8
Corporate Hedging Decisions:
Ivoire Rubber
Exporting rubber to Mexico, get paid in
Mexican pesos. Funding is in U.S.
dollars.
Copyright ©2003 Ian H. Giddy
Introduction 9
Tuesday:
International Bank
and Bond Financing
Pricing a Loan to BHP
What maturity and currency
do they want to borrow?
What is the credit quality
of this borrower?
USD
Get USD Libor as
cost-of-funds proxy
A-
Set an appropriate
spread over Libor
Price the loan
Copyright ©2003 Ian H. Giddy
Introduction 11
Pricing a Loan to BHP
USD
Get USD Libor as
cost-of-funds proxy
A-
Set an appropriate
spread over Libor
www.marketprices.ft.com/markets/currencies/money
Price the loan
pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ratings.htm
Copyright ©2003 Ian H. Giddy
Introduction 12
Case Study: Westpac Bond Financing
Why would Westpac issue a US dollar
Eurobond?
 Why has the bank issued other kinds of
bonds?
 How would you explain the Eurobond
issuance process and costs to an
issuer?
 What would be involved in getting a
rating for the company?

Copyright ©2003 Ian H. Giddy
Introduction 13
Westpac Bond Financing Goals
1.
2.
3.
4.
Diversification
- Currency
- Retail and wholesale markets
- Debt product types and maturity term
- Debt investor types and location
Flexibility
Reduce cost and volatility
Global debt presence and performance
Copyright ©2003 Ian H. Giddy
Introduction 14
Westpac Ratings
For senior unsecured debt obligations Westpac has been assigned
the following credit ratings:
Duration
Short term
Long Term
Outlook
Fitch Ratings
F-1+
AA-
Stable
Moody's
Investors
Service&
Standard
Poor's
P-1
Aa3
Stable
A-1+
AA-
Stable
Copyright ©2003 Ian H. Giddy
Introduction 15
Wednesday:
Equity Financing
Techniques
Underwriting Sequence





Engagement: Mandate
signed by issuer
engaging lead manager
Due Diligence:
Conducted by Lead
manager
Documentation: Loan
agreement, Prospectus
Signing: Underwriting
agreement signed and
issue priced
Closing: Settlement of
the offering
Copyright ©2003 Ian H. Giddy
“Beauty Contest”
Engagement
Due Diligence and
Documentation
Signing and Pricing
Closing
Introduction 17
Distribution
Lead Manager
Book-Runner
“International Coordinator
Joint Co-Lead
Joint Co-Lead
Manager
Joint Co-Lead
Manager
Managers
Lead
Lead
Manager
Lead
Manager
Managers
Manager
Manager
Managers
Copyright ©2003 Ian H. Giddy
Co-Lead Manager
Question 1:
Which banks were
involved with the DT
IPO, and what were
their roles?
Selling Agent
Introduction 18
Pricing
Debt Instruments




Equity
Bonds priced according  Mature issue: based on
to yield over benchmark
current market price and
(spread)
market conditions, small
Yield too low – issueQuestion
2: for dilution;
premium
does not sell
comparables
What
price
should
DT
Yield too high – too
 IPO:have,
comparables
and on:
shares
based
much given away
discounted cash flow
Generally syndicate(a)Book value
analysis
holds price for a day; in
a successful issue (b)P/E ratio
yields gradually tighten
(c)Future cash flows
Copyright ©2003 Ian H. Giddy
Introduction 19
Valuing a Firm with DCF:
The Short Version
Historical
financial
results
Projected sales
and operating
profits
Adjust for
noncash
items
Free cash flows to the firm
(FCFF)
Discount to present using
constant growth model
FCFF(1+g)/(WACC-g)
Present
value of free
cash flows
Copyright ©2003 Ian H. Giddy
- Market
value of
debt
Calculate weighted
average cost of
capital (WACC)
Estimate stable
growth rate (g)
Value of
shareholders
equity
Introduction 20
Valuing a Firm with DCF:
The Extended Version
Historical
financial
results
Adjust for
nonrecurring
aspects
Gauge
future
growth
Projected sales
and operating
profits
Adjust for
noncash
items
Projected free cash flows
to the firm (FCFF)
Year 1
FCFF
Year 2
FCFF
Year 3
FCFF
Year 4
FCFF
Discount to present using weighted
average cost of capital (WACC)
Present
value of free
cash flows
Copyright ©2003 Ian H. Giddy
+ cash,
securities &
excess assets
- Market
value of
debt
…
Terminal year FCFF
Stable growth model
or P/E comparable
Value of
shareholders
equity
Introduction 21
Mt Cameroon
Ecotours
Mount Cameroon Ecotours
Last Year
Tourists
Revenue/Tourist
Revenues
Expenses
Profit
Capex
Working Cap
Free cash flows:
Expected Return
Terminal Value
PV (Cashflows)
NPV
Cash
Firm Value
Equity to Raise
Equity to Firm
Copyright ©2003 Ian H. Giddy
700
0.65
455.00
(305.00)
150.00
12,357
1,300
13,657
5,000
8,657
Year 1
Year 2
Year 3
Year 4
850
0.65
552.50
(442.50)
110.00
(2,100.00)
(500.00)
(2,490.00)
935
0.65
607.75
(463.75)
144.00
1,100.00
(50.00)
1,194.00
2,550
2,805
3,086
1.30
1.30
1.30
3,315.00 3,646.50 4,011.15
(867.50) (931.25) (1,001.38)
2,447.50 2,715.25 3,009.78
25%
25%
25%
(1,992.00)
764.16
1,224.96
(55.00)
(55.50)
2,392.50 2,659.75
Year 5
Terminal
3,240
1.30
4,211.71
(1,039.94)
3,171.76
(55.55)
2,954.23
(27.78)
3,143.99
25%
25%
1,089.43
968.04
15%
31,439.86
10,302.21
= 5,000 - 2,200 - 1,000 -500
37% Percentage of equity to investors
63% Percentage of equity to owners
Introduction 22
Thursday:
Structured Financing
Techniques
When Debt and Equity are Not Enough
Assets
Liabilities
Debt
Value
of future
cash flows
What if...
Claims
are inadequate?
Contractual int. & principal
No upside
Senior claims
Control via restrictions
Equity
Returns
are inadequate?
Residual payments
Upside and downside
Residual claims
Voting control rights
Copyright ©2003 Ian H. Giddy
Introduction 24
Case Study:
Banpu Convertible
 How
did this work?
 Why did Banpu use this technique?
 Why did investors buy it?
Copyright ©2003 Ian H. Giddy
Introduction 25
Asset-Backed Securities:
The Typical Structure
FORD (SPONSOR)
LOANS.
Servicing Agreement
SALE OR
ASSIGNMENT
SPECIAL
PURPOSE
VEHICLE
LOANS.
Copyright ©2003 Ian H. Giddy
ISSUES
ASSET-BACKED
CERTIFICATES
Introduction 26
LBO Financing
NEWCO
Cost of
purchasing
the
business
Copyright ©2003 Ian H. Giddy
Senior
debt $457
Mezzanine
What securities?
What returns?
What investors?
Equity $25
Introduction 27
Friday:
Financial
Restructuring
Restructuring
Figure out what the business is
worth now
Use valuation model – present value
of free cash flows
Fix the business mix – divestitures
Value assets to be sold
Fix the business – strategic partner
or merger
Value the merged firm with
synergies
Fix the financing – improve D/E
structure
Revalue firm under different
leverage assumptions – lowest
WACC
Fix the kind of equity
What can be done to make the
equity more valuable to investors?
Fix the kind of debt or hybrid
financing
What mix of debt is best suited to
this business?
Fix management or control
Value the changes new control
would produce
Copyright ©2003 Ian H. Giddy
Introduction 29
Identify the Reason
Find the Remedy
Trouble!
Reason
The financing
is bad
Business
mix is bad
The company
is bad
Remedy
Raise equity
or
Change debt mix
Sell some businesses
or assets
to pay down debt
Change control
or management
through M&A
Copyright ©2003 Ian H. Giddy
Introduction 30
The Gains From an Acquisition
Gains from merger
Synergies
Top line
Copyright ©2003 Ian H. Giddy
Bottom line
Control
Financial
restructuring
Business
Restructuring
(M&A)
Introduction 31
Optika-Schirnding with Synergy
Schirnding-Optika
Optika
Growth
Tax rate
Initial Revenues
COGS
WC
Equity Market Value
Debt Market Value
Beta
Treasury bond rate
Debt spread
Market risk premium
5%
35%
3125
89%
10%
1300
250
1
7%
1.5%
5.50%
Schirnding
5%
35%
4400
87.50%
10%
2000
160
1
7%
1.5%
5.50%
T+1
3281
2920
74
287
187
16
171
12.50%
5.53%
11.38%
2278
Combined
5%
35%
7525
10%
3300
410
1
7%
1.5%
5.50%
Synergy
5%
35%
7525
86.00%
10%
3300
410
1
7%
1.5%
5.50%
T+1
4620
4043
200
378
245
22
223
12.50%
5.53%
11.98%
7901
6963
274
664
432
38
394
12.50%
5.53%
11.73%
T+1
7901
6795
274
832
541
38
503
12.50%
5.53%
11.73%
3199
5859
Case Study: Ashanti-Bogoso
Revenues
-COGS
-Depreciation
=EBIT
EBIT(1-Tax)
-Change in WC
=Free Cash Flow to Firm
Cost of Equity (from CAPM)
Cost of Debt (after tax)
WACC
Firm Value
Increase
Copyright ©2003 Ian H. Giddy
7479
1620
Introduction 32
Copyright ©2003 Ian H. Giddy
Introduction 33
http://giddy.org
Sunday
Introduction to the workshop
• Introduction to the Workshop and the objectives
• Introduction of participants
• Faculty
• Confidentiality
• Case approach
• The plan of attack and key issues
Opening dinner
Copyright ©2003 Ian H. Giddy
Introduction 34