Carrefour Case Study

Introduction

Carrefour is a French company created in 1959. It is today the second biggest super market in the world after Wall Mart with a total income of $112B (2011). This case will focus on Carrefour's currency risk management in 2002.

In 2002 Carrefour was composed of 5200 stores and generated $53,9B. Its main growth market is outside of France. However its main source of financing was in currency of its business operations. The creation of the euro in 1999 reduced the interest rate risk Carrefour faced in other countries of the Eurozone, however its exposure to other currencies was still present with for example: the United Kingdom pound, the Unites States Dollar, or the Swiss Franc...

In this case we will analyze the different costs Carrefour would face to raise capital through debt markets (bonds) in these different currencies.

Eurobonds

The Eurobond market exists because, like other bond markets, innovation and competition developed specific niche markets for firms that needed them.

Carrefour has plentiful debt capital available domestically, however, if it only issues bonds domestically, it cannot make the firm raise the currencies that meet its expectations with the lowest cost possible. Therefore, international firms like Carrefour prefer to issue Eurobonds. This is because the Eurobond market has the following advantages:

a. A variety of foreign currencies that can be obtained by the firm more easily. Additionally, the investors have more currencies to choose from which increases the inverter pool.

b. The Eurobond market has a high liquidity, so firms that have high credit rating like Carrefour can issue the bond with lower interest expenses and financing cost.

c. The restrictions from foreign governments and the financial legislation on the issuing of Eurobonds can be considered as loose.

Therefore, even though plentiful debt capital is available domestically, it would be better for Carrefour to issue bonds in the Eurobond market.

The Fisher Effect

If we compare the 10- year coupon rates of: the US dollar, the UK pound, the Euro and the Swiss Franc, we notice that the Swiss Francs bonds have the lowest coupon rates 3.675% whereas the second one the Eurobonds is at 5.25%. This is a significant difference. It seems that if other factors remain unchanged, one should choose Swiss Francs bonds to finance cheaply his business.

However there are no "free lunches" in the world. We can't just consider the coupon rate to make the decision. We must consider the Fisher Effect. This means that we should also take inflation into consideration.

According to the fisher effect:

Real interest rate = Nominal Interest rate + Inflation

Nominal interest Rate = Real Interest Rate - Inflation

On July 2002 the nominal interest rates of the currencies are: (estimation for bond emission at end 2002 beginning 2003)

Currencies Real Interest Rates (%) Inflation Rates (%) Nominal Interest Rates (%)

US Dollar 4,7 1,9 2,9

UK pound 5 3 2

Euro 4,8 1,5 3,3

Swiss Franc 3 0,9 2,1

(We can see that apparently the most expensive, however the inflation rate is not based on the Eurozone, it is only based on France, therefore this element is biased)

This calculation indicates that in general the nominal interest rates range between 2% or 3% for every currency. The Swiss Franc has one of the smallest nominal interest rates; it also has the smallest inflation rate. The cost of debt will be smaller with the bonds issued in Switzerland compared to all the other bonds.

Therefore Selling Swiss Franc Bonds with a coupon of 3⅝ is not a "no-brainer" because it is higher than the Current Risk Free Real Interest Rate, the difference represents the risk premium the inverters demand for this bond.

Additionally, one can see that even with this extra premium, the interest rate of the Swiss Franc issued bond is still smaller than any other Risk Free Real Rate of the other currencies.

However we must underline that this analysis does not take into consideration