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

Copyright ©2003 Ian H. Giddy Introduction 4 Global Financial Architecture Exchange Rate System? FixedFloating …or what?

Copyright ©2003 Ian H. Giddy Introduction 5 Cap des Biches: Choices for GTI-Dakar n Renegotiate the $30 million loan, replacing it with a loan denominated in Euros n Keep the USD loan in place, but enter into a 6-year currency swap to effectively convert GTI's payments into Euros. n Hedge the dollar-Euro risk by buying dollars forward, with rolling 3-month forward contracts n Hedge against a possible devaluation of the CFA franc, by selling francs in the 3-month forward market. n Leave the dollar loan unhedged, and pass the cost of any foreign exchange losses on to Senelac, the buyer of GTI's power n Do nothing now but watch the situation carefully and hedge if the risk becomes too great.

Copyright ©2003 Ian H. Giddy Introduction 6 The International Money Markets Source: ft.com

Copyright ©2003 Ian H. Giddy Introduction 7 Foreign Exchange Quotations SpotForward points

Copyright ©2003 Ian H. Giddy Introduction 8 Ecobank l Cost of GBP: 3 19/32 = % l Cost of EUR, hedged into GBP: [1.4282(1+2 17/32 /400)/ ]4 =

Copyright ©2003 Ian H. Giddy Introduction 9 Corporate Hedging Decisions: Ivoire Rubber Exporting rubber to Mexico, get paid in Mexican pesos. Funding is in U.S. dollars.

Tuesday: International Bank and Bond Financing

Copyright ©2003 Ian H. Giddy Introduction 11 Pricing a Loan to BHP What maturity and currency do they want to borrow? Get USD Libor as cost-of-funds proxy USD What is the credit quality of this borrower? Set an appropriate spread over Libor A- Price the loan

Copyright ©2003 Ian H. Giddy Introduction 12 Pricing a Loan to BHP Get USD Libor as cost-of-funds proxy USD Set an appropriate spread over Libor A- Price the loan pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ratings.htm

Copyright ©2003 Ian H. Giddy Introduction 13 Case Study: Westpac Bond Financing l Why would Westpac issue a US dollar Eurobond? l Why has the bank issued other kinds of bonds? l How would you explain the Eurobond issuance process and costs to an issuer? l What would be involved in getting a rating for the company?

Copyright ©2003 Ian H. Giddy Introduction 14 Westpac Bond Financing Goals 1. Diversification - Currency - Retail and wholesale markets - Debt product types and maturity term - Debt investor types and location 2. Flexibility 3. Reduce cost and volatility 4. Global debt presence and performance

Copyright ©2003 Ian H. Giddy Introduction 15 Westpac Ratings DurationShort termLong TermOutlook Fitch RatingsF-1+AA-Stable Moody's Investors Service P-1Aa3Stable Standard & Poor's A-1+AA-Stable For senior unsecured debt obligations Westpac has been assigned the following credit ratings:

Wednesday: Equity Financing Techniques

Copyright ©2003 Ian H. Giddy Introduction 17 Underwriting Sequence l Engagement: Mandate signed by issuer engaging lead manager l Due Diligence: Conducted by Lead manager l Documentation: Loan agreement, Prospectus l Signing: Underwriting agreement signed and issue priced l Closing: Settlement of the offering Engagement Due Diligence and Documentation Due Diligence and Documentation Signing and Pricing Closing “Beauty Contest”

Copyright ©2003 Ian H. Giddy Introduction 18 Distribution Lead Manager Book-Runner “International Coordinator Joint Co-Lead Manager Joint Co-Lead Manager Joint Co-Lead Managers Lead Manager Lead Manager Lead Managers Manager ManagersSelling Agent Co-Lead Manager Question 1: Which banks were involved with the DT IPO, and what were their roles?

Copyright ©2003 Ian H. Giddy Introduction 19 Pricing Debt Instruments l Bonds priced according to yield over benchmark (spread) l Yield too low – issue does not sell l Yield too high – too much given away l Generally syndicate holds price for a day; in a successful issue yields gradually tighten Equity l Mature issue: based on current market price and market conditions, small premium for dilution; comparables l IPO: comparables and discounted cash flow analysis Question 2: What price should DT shares have, based on: (a)Book value (b)P/E ratio (c)Future cash flows

Copyright ©2003 Ian H. Giddy Introduction 20 Valuing a Firm with DCF: The Short Version Historical financial results Adjust for noncash items Projected sales and operating profits Free cash flows to the firm (FCFF) Calculate weighted average cost of capital (WACC) Estimate stable growth rate (g) Present value of free cash flows - Market value of debt Value of shareholders equity Discount to present using constant growth model FCFF(1+g)/(WACC-g)

Copyright ©2003 Ian H. Giddy Introduction 21 Valuing a Firm with DCF: The Extended Version Historical financial results Adjust for nonrecurring aspects Gauge future growth Adjust for noncash items Projected sales and operating profits Projected free cash flows to the firm (FCFF) Year 1 FCFF Year 2 FCFF Year 3 FCFF Year 4 FCFF Terminal year FCFF Stable growth model or P/E comparable Present value of free cash flows + cash, securities & excess assets - Market value of debt Value of shareholders equity … Discount to present using weighted average cost of capital (WACC)

Copyright ©2003 Ian H. Giddy Introduction 22 Mt Cameroon Ecotours

Thursday: Structured Financing Techniques

Copyright ©2003 Ian H. Giddy Introduction 24 When Debt and Equity are Not Enough Value of future cash flows Value of future cash flows Contractual int. & principal No upside Senior claims Control via restrictions Contractual int. & principal No upside Senior claims Control via restrictions AssetsLiabilities Debt Residual payments Upside and downside Residual claims Voting control rights Residual payments Upside and downside Residual claims Voting control rights Equity What if... Claims are inadequate? Returns are inadequate?

Copyright ©2003 Ian H. Giddy Introduction 25 Case Study: Banpu Convertible n How did this work? n Why did Banpu use this technique? n Why did investors buy it?

Copyright ©2003 Ian H. Giddy Introduction 26 Asset-Backed Securities: The Typical Structure FORD (SPONSOR) SPECIAL PURPOSE VEHICLE LOANS. ISSUES ASSET-BACKED CERTIFICATES SALE OR ASSIGNMENT LOANS. Servicing Agreement

Copyright ©2003 Ian H. Giddy Introduction 27 LBO Financing NEWCO Cost of purchasing the business Equity $25 Senior debt $457 What securities? What returns? What investors? Mezzanine

Friday: Financial Restructuring

Copyright ©2003 Ian H. Giddy Introduction 29 Restructuring Figure out what the business is worth now Use valuation model – present value of free cash flows Fix the business mix – divestituresValue 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 equityWhat 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 controlValue the changes new control would produce

Copyright ©2003 Ian H. Giddy Introduction 30 Identify the Reason Find the Remedy Trouble! The financing is bad The company is bad Business mix is bad Raise equity or Change debt mix Change control or management through M&A Sell some businesses or assets to pay down debt Reason Remedy

Copyright ©2003 Ian H. Giddy Introduction 31 The Gains From an Acquisition Gains from merger SynergiesControl Top lineFinancial restructuring Business Restructuring (M&A) Bottom line

Copyright ©2003 Ian H. Giddy Introduction 32 Optika-Schirnding with Synergy Case Study: Ashanti-Bogoso

Copyright ©2003 Ian H. Giddy Introduction 33

Copyright ©2003 Ian H. Giddy Introduction 34 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