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Transcript
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