The Refinancing of Shanghai

General Motors

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

12/8/21 Sample footer 1

AGENDA
 Introduction
 About SGM
 Capital Structure
 Why a Joint Venture?
 Identification of the Problems of the Case
 Primary Problem
 Second Problem
 Addressing the Primary Problem
 Problems of Existing Financing Terms
 Possible solutions
 Refinancing
 Drawing on existing loans
 Addressing the Second Problem
 Risks Faced
 Mitigating Risks
 Conclusion
 Learning from the case
Introduction

ABOUT SHANGHAI GENERAL MOTORS

FOUNDED IN ●
June 12, 1997

●
50% with General Motors
OWNERSHIP ●
50% with Shanghai Automotive Industry Corporation

●
Chevrolet
PRODUCTS ●

●
Buick
Cadillac
Capital Structure of SGM
●
Source: General ●
Source: SAIC
Motors ●
USD 350 million
●
Amount: USD 350
equivalent
million

Equity 23% Equity 23%

Debt Debt
31% 23%

●
USD Lenders ●
Chinese Lenders
●
Amount: USD ●
USD 349million
USD472million equivalent

12/8/21 Sample footer 4

Cost of Initial Financing
Cost Cost

Floating LIBOR +105 bps Floating PBOC rate

Chinese
USD
RMB
Loan
Loan

12/8/21 Sample footer 5

Why a Joint Venture?
China was a promising market and GM had the means to do it all
alone. Then why did it choose to go for a joint venture?

 Reduces entry risks by using the local partner’s assets

 Can gain access to local borrowing powers
 There is access through local resources through participation

of national partner
 Can access the foreign technology or expertise
12/8/21 Sample footer 6
Identification of the Problem

 Primary problem of the case is:

For its upcoming SAIL project, should SGM use project-
financing on existing terms or re-finance its existing
debts altogether and start afresh?

 Secondary Problem:
How to hedge the foreign currency risk of SGM given the
restrictive nature of derivative trading in China

7
 ADDRESSING
THE PRIMARY
PROBLEM
12/8/21 Sample footer 8
Problems of Existing Financing Terms

1. High cost of debt due to Asian Crisis. Situations

have improved since then and loans are
available at more favorable terms

2. 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
Problems of existing financing terms

3. The super-majority clause was restricting

decision making in areas such as expansion,
capital expenditure etc

4. USD LIBOR rates at 6.2% were higher than

the Chinese RMB rate of 5.85%, yet re-
adjustment was not possible due to the
proportionate borrowing clause between
USD and RMB
12/8/21 Sample footer 10
Problems of existing financing terms

5. Use of derivatives for hedging risks was also

restricted except for forward contracts

6. Capital control by SAFE:

The controlled supply of foreign currency by
SAFE made the repayment of USD loan
uncertain

12/8/21 Sample footer 11

Possible Solutions

OPTION 1: REFINANCING

HOW TO GO ABOUT IT??

12
 Trend of 6mnth LIBOR & PBOC Rates

Interest rates in China has been lower than the 6 month LIBOR rates on which the USD
loans were based

LIBOR
7
6
5
4
3
2
1
0
Dec/99 Dec/00 Dec/01 Dec/02 Dec/03
12/8/21 Sample footer 13
Trend of CNY/USD exchange rate

The chart below shows quite a stable exchange rate between 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.S.

CNY/USD
8.28
8.28
8.28
CNY/USD
8.28
8.28
9 9 9 9 9 9 9 9 9 0 0 0
/r 9 y/9 n/9 /l 9 g/9 p/9 t/9 v/9 c/9 n/0 b/0 r/0
Ap Ma Ju Ju Au Se O
c
No D
e Ja Fe M
a

12/8/21 Sample footer 14

Comparison of Inflation between US
and China
Inflation rates in US have been historically higher than that of
China

3
Average Inflation in
2 US
1 Average Inflation in
China
0
1999 2000 2001 2002 2003
-1

-2
12/8/21 Sample footer 15
Refinancing:

Based on the above three statistics, we feel that even if the

interest rate parity and purchasing power parity holds
loosely, it will be more profitable to borrow in Chinese
currencies.

Hence the course of action available to SGM are:

Borrow in Chinese currency and repay the old loans
Reduce exposure to foreign exchange as there are not
many hedging options available
Become self-sufficient, i.e. reduce dependency on
parent company

12/8/21 Sample footer 16

Possible Solutions

Option 2: Take no action, i.e., continue to

draw on the unused part of the USD and
RMB loans to finance SAIL

HOW WILL IT AFFECT SGM??

12/8/21 Sample footer 17

  Continued dependency on the existing banking
committee. Decision making will be slow and SGM
will not be able to react quickly to the increased
competition when China joins WTO

 Cannot take advantage of the interest rate

differentials

 In the face of increased competition, SGM will not

be able to reduce its interest expense
12/8/21 Sample footer 18
 ADDRESSING
THE
SECONDARY
PROBLEM
12/8/21 Sample footer 19
Risks Faced

 Interest Rate Risk

▪ Risk of an increase in 6mnth LIBOR or PBOC rates

 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

12/8/21 Sample footer 20

Mitigating Interest Rate Risk

1.Since there aren’t any derivatives available,

interest rate risk can be mitigated only by an
interest rate cap
2. Forward Rate Agreements

3.Interest rate swap if possible:

Floating Fixed rate
rate
SGM BANK

Floating
rate
12/8/21 Sample footer 21
Mitigating Exchange Rate Risks

 Localization: reducing dependency on US imports

and thus reducing USD liability

 Refinancing: Change the borrowings 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

12/8/21 Sample footer 22

Conclusion

LEARNINGS FROM THE CASE:

12/8/21 Sample footer 23