Group 4 - Refinancing of Shanghai General Motors

1
The Refinancing of
Shanghai General
Motors
GROUP 4
0272/58 Anuska Saha
0039/58 Jitesh Mittal
0152/58 Srikar Gokavarapu
0206/58 Chinmay Limaye
0358/58 Aannshul Bandiya
08/08/22 2
FOUNDED IN OWNERSHIP PRODUCTS

June 12, 1997 50% with General Chevrolet
Motors Buick
50% with Shanghai Cadillac
Automotive Industry
Corporation
About Shanghai General Motors
Sample footer
3
• Source: General Motors • Source: SAIC

• Amount: USD 350 million • USD 350
million
equivalent
Equity Equity
23% 23%
Capital Structure
of SGM Debt Debt
31% 23%
• USD Lenders • Chinese Lenders:
• Amount: USD USD472 USD 349 million
million equivalent
4
Cost of Initial Financing
USD Loan
• Cost
• Floating LIBOR +105 bps
Chinese RMB Loan
• Cost
• Floating PBOC rate
5
 Primary problem of the case is:

For its upcoming SAIL project, should SGM
use project-financing on existing terms or
re-finance its existing debts altogether
and start afresh?
Identification
of the
 Secondary Problem:
How to hedge the foreign currency risk of
Problem
SGM given the restrictive nature of
derivative trading in China
6
Problems of Existing
Financing Terms
1. High cost of debt due to Asian Crisis. Situations

have improved since then and loans are available at
more favorable terms
2. Restrictive clauses of existing financial terms:

 Any finance related decision needed a super-
majority approval of the existing bank committee
 All existing and future assets of SGM were
pledged
 Equal use and pro-rata repayment of Cinese and
American currency loans
7
Problems of existing financing

terms
3. The super-majority clause was restricting decision

making in areas such as expansion, capital
expenditure etc
4. USD LIBOR rates at 6.2% were higher than the

Chinese RMB rate of 5.85%, yet re-adjustment was
not possible due to the proportionate borrowing
clause between USD and RMB
8
Problems of existing financing

terms
5. Use of derivatives for hedging risks was also

restricted except for forward contracts
6. Capital control by SAFE:

The controlled supply of foreign currency by SAFE
made the repayment of USD loan uncertain
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LIBOR
8
Trend of 6mnth
4
0
LIBOR &
9 9 0PBOC
0 01 02Rates03
c/ c / c / c / c /
Interest rates in China has De De De De De
been lower than the 6-
month LIBOR rates on
which the USD loans were
based
10
CNY/USD
8.28
8.279
8.278
8.277 CNY/USD
8.276
Trend of
CNY/USD
exchange
rate The chart above shows quite a stable exchange
rate between USD and CNY during the period
under discussion. Hence there is not much risk of
loss in repatriation of profit due to currency
appreciation in U.S.
11
Inflation rates in US have been historically

higher than that of China
Comparison
of Inflation 4
between US 3
Average In-
and China 2 flation in US

Average In-
1 flation in
0 China
1999 2000 2001 2002 2003
-1
-2
12
Based on the above three statistics, we feel that

even if the interest rate parity and purchasing
power parity holds loosely, it will be more
profitable to borrow in Chinese currencies.
Refinancing: Hence the course of action available to SGM

are:
Borrow in Chinese currency and repay
the old loans
Reduce exposure to foreign exchange
as there are not many hedging options
available
Become self-sufficient, i.e. reduce
dependency on parent company
13
Option 2: Take no action, i.e., continue to

draw on the unused part of the USD and
RMB loans to finance SAIL
 Continued dependency on the existing banking committee.

Decision making will be slow and SGM will not be able to
react quickly to the increased competition when China
joins WTO
 Cannot take advantage of the interest rate differentials
 In the face of increased competition, SGM will not be

able to reduce its interest expense
14
 Interest Rate Risk

 Risk of an increase in 6mnth LIBOR or PBOC
rates
Risks Faced  Currency Exchange Rate Risk

 Risk of depreciation of Chinese currency and thus
dearer imports from US
 Risk of SAFE not supplying enough USD to
make payments
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1.Since there aren’t any

derivatives available,
2. Forward Rate
interest rate risk can be
Agreements
mitigated only by an
interest rate cap
Mitigating 3.Interest rate swap if possible:
Interest Rate
Risk Fixed rate
SGM BANK
Floating rate
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Mitigating Exchange Rate

Risks
 Localization: reducing dependency on US imports and

thus reducing USD liability
 Refinancing: Change the borrowings from USD loans to

Chinese RMB loans to avoid payment in USD
 Export: Export products to US in order to balance out

payables and receivables in the same currency
17
Thank You!

Group 4 - Refinancing of Shanghai General Motors

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1

FOUNDED IN OWNERSHIP PRODUCTS

About Shanghai General Motors

• Source: General Motors • Source: SAIC

Cost of Initial Financing

Chinese RMB Loan

 Primary problem of the case is:

1. High cost of debt due to Asian Crisis. Situations

2. Restrictive clauses of existing financial terms:

Problems of existing financing

3. The super-majority clause was restricting decision

4. USD LIBOR rates at 6.2% were higher than the

Problems of existing financing

5. Use of derivatives for hedging risks was also

6. Capital control by SAFE:

Inflation rates in US have been historically

and China 2 flation in US

Based on the above three statistics, we feel that

Refinancing: Hence the course of action available to SGM

Option 2: Take no action, i.e., continue to

 Continued dependency on the existing banking committee.

 Cannot take advantage of the interest rate differentials

 In the face of increased competition, SGM will not be

 Interest Rate Risk

Risks Faced  Currency Exchange Rate Risk

1.Since there aren’t any

Mitigating 3.Interest rate swap if possible:

Mitigating Exchange Rate

 Localization: reducing dependency on US imports and

 Refinancing: Change the borrowings from USD loans to

 Export: Export products to US in order to balance out

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