Topic: Financial Markets
Paper details: Final Report-Executing the Big Deal
An Australian Company needs to raise capital to develop its local business and is looking at the US bond market to diversify its funding sources.
Vector Bank has been engaged by the Company to be the lead manager of a USD100 Million 5 Year Fixed Rate Bond Issue.
The bond issue will be managed by Vector Bank’s US subsidiary, an entity that is formally licenced to undertake capital raisings in the US.
Once the bonds are issued, the USD bond proceeds need to be converted to Australian Dollars as the financing is for the Company’s Australian business.
The Company is concerned about the foreign exchange risks associated with this USD debt and believes a Cross Currency Interest Rate Swap is the ideal product to hedge this risk converting the USD to AUD. Vector Bank Aust is an authorised OTC dealer and can offer this product.
The Company’s new project in Australia has sufficient cash flows for the AUD interest cost to be floating or variable, except in a situation where interest rates are 3% higher than current market rates, considered a probability of 50% or less.
The Company has engaged the services of an external Advisor to assist in negotiating terms of the bond issue and any hedging requirements.
The Advisor has informed Vector Bank Aust they can undertake any hedging but has requested to be present in the trading room when transaction closes to monitor the execution process.
You have been asked by the Vector Bank’s Global Head of Markets to prepare a 2-page report outlining this transaction including any hedge solutions to manage any foreign exchange and interest rate risk. In particular, the GM Head will be interested in:
How the CCS converts the US Bond proceeds to AUD, using diagrams to highlight cashflows.
Are they any other alternatives?
What are the pros and cons for each alternative?
How can the Client manage any AUD interest rate risk?
Should the CCS be centrally cleared and subject to initial/variation margin requirements?
What are the international guidelines to determine whether it should/should not?
3. Should Vector Bank allow the advisor to be in the dealing room when the transaction is executed:
How can they ensure the details of this transaction are kept confidential?
Given the size of this transaction is there any possibility the market is anticipating this transaction, thereby adversely affecting any execution price
The GM Head wants specific references for each question to validate the details and has a copy of the Reference Notes used in this course.
Market Rates
Bond Issuance USD100 Million
5 Year USD Bond Yield 5.00%
5 Year AUD Swap Rate 4.00%
AUD/USD Spot FX $0.6500
Instructions
Please submit your work in a Word Document
There is a 2-page overall limit using 12pt Arial font and 1.5 line spacing. Use sub-titles ‘Question 1’ and so on.
A reference list should be included and is not counted in the 2-page limit.
Referencing
Please use references and quotes to support your arguments. Graphs and tables are also a good idea to include, but remember to embed them in-tecejxt next to the paragraph where they’re discussed.
