Carrefour S.A. (international Business Finance)

1. Introduction

1.1 Brief

In August 2002, the French retail giant Carrefour S.A. was considering alternative currencies for raising (euro) EUR750 million in the Eurobond market. Its investment banks, Morgan Stanley and UBS Warburg, had suggested that Carrefour to consider borrowing in British pound sterling in order to take advantage of a borrowing opportunity in the currency in Carrefour attempt of fund it expansion. This report was commissioned by a junior financial analyst Sikhumbuzo Bhengu in request by Carrefour S.A.'s CFO Barry Strydom. The report was requested in order to identify the cost effective currency in which the firm should issue the bond to that currency denominated, and it f turn that foreign currency is effective then the hedging strategy required to hedge exchange rate risk. The report required to be completed and handed in on the 3rd of October 2011.

1.2 Method of investigation

This problem solving report is performed on the basis of the information in hand and the report was not been expanded beyond the scope of the data information provided by Carrefour S.A. There is no internet research conducted on the Carrefour S.A. position in the market. It is assumed that the information provided in the case study regarding Carrefour S.A. is true and accurate. The interest rate parity is the main underlying theory that is used in this report. The excel spread sheet is only used and there is no other complex program used.

1.3 Problem definition

In the summer of 2002, Carrefour S.A. is seeking to raise €750 million debt financing at a low costs by issuing it bond either in domestic country's (France) currency or issue foreign currency denominated bond in the Eurobond market. In August 2002, Carrefour S.A.'s investment banks (Morgan Stanley and UBS Warburg) had expected that the Carrefour 10-year bonds can be issued at 5.25% in Euros, 5.375% in British pounds, 3.625% in Swiss francs, and 5.5% in U.S. dollars. It is assumed that these bonds are issued at par. Its investment banks also suggested that the British-pound issue appears to provide the lowest cost of funds.

1.4 Objective

To examine the borrowing option which provide Carrefour with the lowest cost of funds.

To determine the currency risk hedging strategy

2. Data and Methodology

All the necessary data was given by Carrefour S.A. and excel was used compute all needed bond payments including the repayment of principal. Excel was also used to compute the forecasted exchange rate.

The exchange rate was forecasted using a market based forecast which is a forecast based on market indicators such as forward rates. The forecasted exchange rate was computed using the following formula (Kim and Kim, 2006: 207):

e_t=e_0 [〖(1+i_d)〗^t⁄(〖(1+i_f)〗^t])

Where e_t (forecasted exchange rate) is the euro price of one unit of foreign currency in period t, e_0 (spot exchange rate) is the euro price of one foreign currency in the current period, id is the domestic interest rate, and if is the foreign interest rate. The spot exchange rate and interest rate was provided in the information given by Carrefour.

3. Findings

Carrefour S.A. to raise it debt should consider whether raising debt internationally is cheaper than raise the debt domestically. The first step is to consider before issuing the foreign currency denominated bond is examine the currency which offer lower yield on the bond, this is crucial because the firm seek to find the cheapest bond payments. The foreign currency denominated bond is exposed to exchange rate during the financing period hence there is no guarantee that the foreign currency denominated bond will be cheaper than the domestic currency denominated bond (Madura, 2008: 501). The different exchange rate for different countries can cause the company to do not choose the foreign currency denominated bond with low yield. The foreign currency denominated bond that seems to be superior (one with cheaper coupon payments) to Carrefour S.A. then the firm will make coupon payments in that foreign currency denominated bond.

It is essential to convert the €750 000 000.00 (domestic currency denominated bond) into foreign currency denominated bond using current spot exchange rate, so that these principals will be used to compute coupon payments needed to be paid by Carrefour. Table 1 below shows the bond principal amount denominated in each country's currency and all other bond specifications.

Table 1: Bond specifications if issued in each of the four different countries.

France (€) UK (£) Switzerland (SF) US ($)

Principal 750 000 000.00 470 809 792.84 1 090 116 279.07 735 294 117.65

Coupon rate (%) 5.25 5.375 3.625 5.5

Maturity period 10 10 10 10

spot exchange rate 1 1.593 0.688 1.02

The table 2 below shows the coupon payments for the €750 million bond if it was issued in France (domestic country) or if it is issued in foreign denominated currencies (pound sterling, Swiss franc, and U.S. dollar). It is not easy to identify the currency which has the lowest cost of bond because the bond payments are denominated in different currencies.

Table 2: The coupon bond payments denominated in each country's currency

Bond Cash outflows

Year End Euro Bond UK Bond SF Bond US Bond

1 39 375 000.00 25 306 026.37 39 516 715.12 40 441 176.47

2 39 375 000.00 25 306 026.37 39 516 715.12 40 441 176.47

3 39 375 000.00 25 306 026.37 39 516 715.12 40 441 176.47

4 39 375 000.00 25 306 026.37 39 516 715.12 40 441 176.47

5 39 375 000.00 25 306 026.37 39 516 715.12 40 441 176.47

6 39 375 000.00 25 306 026.37 39 516 715.12 40 441 176.47

7 39 375 000.00 25 306 026.37 39 516 715.12 40 441 176.47

8 39 375 000.00 25 306 026.37 39 516 715.12 40 441 176.47

9 39 375 000.00 25 306 026.37 39 516 715.12 40 441 176.47