By: Bhavesh Jain Adrija Chakraborty (F09063) Aman Gupta (F09067) Neeraj Jain (F09097) Sofia Saxena (F09115


March 10, 2011

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About SGM  Capital Structure  Why a Joint Venture?  Primary Problem  Second Problem


Identification of the Problems of the Case Addressing the Primary Problem Possible solutions 
Problems of Existing Financing Terms  Refinancing  Drawing on existing loans  Risks Faced  Mitigating Risks  Learning from the case

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Addressing the Second Problem

1997 OWNERSHIP PRODUCTS 50% with General Motors 50% with Shanghai Automotive Industry Corporation Chevrolet Buick Cadillac .ABOUT SHANGHAI GENERAL MOTORS FOUNDED IN June 12.

Source: General Motors Amount: USD 350 million Source: SAIC USD 350 million equivalent Equity 23% Debt 31% USD Lenders Amount: USD USD472million Equity 23% Debt 23% Chinese Lenders USD 349million equivalent March 10. 2011 Sample footer 4 .

2011 Sample footer Chinese RMB Loan Cost Floating PBOC rate 5 .USD Loan Cost Floating LIBOR +105 bps March 10.

2011 ¡  le footer 6 .Chi a was a r isi ark t a ha the ea s t al e. hen why i it choose to o for a joint vent re? it all    Reduces entry risks by using the local artner s assets Can gain access to local borrowing owers here is access through local resources through artici ation of national artner  Can access the foreign technology or ex ertise Sa March 10.

ƒ Primary problem of the case is: For its upcoming SAIL project. should SGM use projectfinancing on existing terms or re-finance its existing debts altogether and start afresh? ƒ Secondary Problem: Ho to hedge the foreign currency risk of SGM given the restrictive nature of derivative trading in China 7 .

2011 Sample footer 8 .ADDRESSING THE PRIMARY PROBLEM March 10.

. Situations have improved since then and loans are available at more favorable terms 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 9 2. High cost of debt due to Asian Crisis.1.

The super-majority clause as restricting decision making in areas such as expansion. 2011 .85%. March 10.2% ere higher than the Chinese RMB rate of 5. yet readjustment as not possible due to the proportionate borro ing clause bet een USD and RMB Sample footer 10 4. capital expenditure etc USD LIBOR rates at 6.3.

Use of derivatives for hedging risks as also restricted except for for ard contracts Capital control by SAFE: The controlled supply of foreign currency by SAFE made the repayment of USD loan uncertain 6.5. 2011 Sample footer 11 . March 10.


2011 Sample footer 13 .Interest rates in China has been lo er than the 6 month LIBOR rates on hich the USD loans ere based LIBOR 7 6 5 4 3 2 1 0 March 10.

The chart belo sho s quite a stable exchange rate bet een 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.276 CNY/USD March 10.278 8.277 8.S.279 8.28 8. 2011 Sample footer 14 . CNY/USD 8.

Inflation rates in US have been historically higher than that of China 4 3 2 1 0 -1 -2 March 10. 2011 Sample footer 15 Average Inflation in US Average Inflation in China 1999 2000 2001 2002 2003 .

e. it ill be more profitable to borro in Chinese currencies. i. e feel that even if the interest rate parity and purchasing po er parity holds loosely. Hence the course of action available to SGM are: Borro in Chinese currency and repay the old loans Reduce exposure to foreign exchange as there are not many hedging options available Become self-sufficient. 2011 Sample footer 16 . reduce dependency on parent company March 10.Based on the above three statistics.

i.e. 2011 Sample footer 17 ..Option 2: Take no action. continue to draw on the unused part of the USD and RMB loans to finance SAIL HOW WILL IT AFFECT SGM?? March 10.

SGM ill not be able to reduce its interest expense Sample footer 18   March 10. 2011 . Decision making ill be slo and SGM ill not be able to react quickly to the increased competition hen China joins WTO Cannot take advantage of the interest rate differentials In the face of increased competition. Continued dependency on the existing banking committee.

2011 Sample footer 19 .ADDRESSING THE SECONDARY PROBLEM March 10.

ƒ Interest Rate Risk Risk of an increase in 6mnth LIBOR or PBOC rates ƒ 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 March 10. 2011 Sample footer 20 .

For ard Rate Agreements 3.1. 2011 Sample footer 21 BANK .Since there aren t any derivatives available. interest rate risk can be mitigated only by an interest rate cap 2.Interest rate s ap if possible: Floating rate Fixed rate SGM Floating rate March 10.

ƒ Localization: reducing dependency on US imports and thus reducing USD liability Refinancing: Change the borro ings 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 Sample footer 22 ƒ ƒ March 10. 2011 .

LEARNINGS FROM THE CASE: March 10. 2011 Sample footer 23 .