Briefly Discuss the Background of Carrefour Sa and Its Financing Practices. What Are the Borrowing Alternatives?

1) Briefly discuss the background of Carrefour SA and its financing practices. What are the borrowing alternatives?

With the introduction of hypermarket concept, Carrefour opened its first shop in 1963 in the small French town, southeast of Paris. The expansion of the company happened quite rapidly opening new shops in France and beyond its borders. Growth was mainly based on selective mergers and acquisitions. In 2001, Carrefour has become Europe`s largest retailer generating Eur2.8 billion operating profits on total net sales of Eur69.5 billion. Of that profit, 5% originated in Asia, 2% Latin America, 26% in Europe outside France with remainder profits coming from French operations. In each country, Carrefour operates primarily within the local economy when buying products, foreign exposure on imported products is hedged through currency-forward contracts. Over the years company`s management had generally financed the growth through securities denominated in the currency of the business operations. In 2001, total Carrefour borrowings were Eur 13.5 billion of which Eur6.4 billion were in publicly traded bonds.

Speaking about other financing opportunities except bonds, first of all we should mention that Carrefour is public company, so secondary share issue is an option. However this option should be considered carefully, looking at the situation and trends in stock markets and calculating possible expenses. Another option how to attract money would be through a long term bank loan. Less know and popular, but still available financing alternatives could be a private placements or subordinated loans.

2) Using the parity forward rates calculate: a. cost of borrowing in CHF; b. cost of borrowing in GBP; c. cost of borrowing in USD

Please have a look at Appendix # 1 with calculations for cost of borrowing for currencies specified and for calculations of forward currency exchange rates. If we assume, that parity relations hold and changes in exchange rate reflect changes in interest rates, then cost of borrowing is as follows:

a) CHF = 3.83%

b) GBP = 5.323%

c) USD = 5.497%

3) Based on your answers in 2), suggest the best borrowing alternative for Carrefour. In which currency (EUR, CHF, GBP, USD) should the company borrow?

Over past three years long-term bond yields had declined in all four currencies and rCHF consistently being the lowest. If we look from perspective of cash flow, then it would be recomended to issue bonds in EUR, because Carrefour has euro denominated cash flow and if depreciation of EUR continues, then paying back debt in foreign currencies would become increasingly expensive. On other hand, we have to take in consideration borrowing costs associated with each currency. From calculations