HUTCHISON WHAMPOA LIMITED: CAPITAL STRUCTURE DECISION

PROBLEM STATEMENT

Under the review of the current position, the finance department of Hutchison Whampoa Limited has quoted that the company will require a minimum of US$500 million of new capital in the upcoming year, the figure is tentative as it will increase depending if the company wanted to maintain its growth trajectory. Hutchison Whompoa Limited is considering all finance options available, that is the company can either issue equity, syndicated bank financing, bonds, straight debt, Euro bonds and Yankee bonds. The below discussion is to determine the best option for Hutchison Whompoa Limited.

MAIN BODY

In the past, Hutchison Whompoa Limited has financed its operations from cash on hand, internal cash generated and up to needs of the company, by short and medium term bank financing. This will lead to the assumption that equity can be the best option for Hutchison Whompoa Limited.

EQUITY

Equity is the easiest access to finance to a company as it is completely internally based especially for a company which is already listed. In addition, when a company will be well known to all the market factors and the market will be well known of the company; it means that there is going to be a knowledgeable investor base and little need of marketing and promotion but it is an expensive mode of finance compared to debt; as a public offer is itself an expensive process but it also leads to corporate and legal regulations that a company has to follow which leads to a significant cost. However, the major implication will be the dilution of holding of all shareholders, which maybe a cause of concern for the Hutchison Whompoa Limited as Cheung Kong holds only 49.9% of the company. Li Ka-Shing will not want to lose control as his holding will dilute if equity is used as the mode of finance, therefore making equity is not a viable option.

SYNDICATED BANK FINANCE

Debt is the cheapest mode of finance compared to equity financing, whereas bank loan is the most convenient of the debt financing. Now considering the specifics of the case Hutchison Whompoa Limited, the company requires funds for 10 years on a flat rate of interest that will be favorable to the company; whereas, the maximum syndicated loan of Hutchison Whompoa Limited can acquire is of 7 years on a floating interest rate, which will make the company open to financial risk The movement of the rate will be dependent on the market situation as the rate charged will be HIBOR plus 60 to 70 bases points, which will not be favorable or feasible to the company.

STRAIGHT DEBT AND BOND ISSUE

After bank loan, the most common debt mode of finance is bonds issued in the home country in this case, straight bonds issued in Hong Kong. It will provide the same kind of benefits as of issuing equity in home market that will provide a knowledgeable customer base to the company; thus it will overcome all the difficulties and cost related to equity issue. Bonds can be tailored as to what the market will be most interested in and what will be most beneficial to the company.

However, Hutchison Whompoa Limited has never issued bonds in the past and it is not a practice of the Hong Kong firms to issue bonds beyond 10 years and none has ever issued 20 year bonds or beyond the bonds that are issued have begun to swamp the market; hence making the market stained and not feasible to issue bonds at the moment.

Hutchison Whampoa Limited The Capital Structure Decision Case Solution

EURO BONDS

Since the current market is not feasible for Hutchison Whompoa Limited to issue bonds in the market, therefore, the company can issue bonds in a foreign market. Euro bonds are bonds which are issued in the foreign market underwritten by international syndicate of banks; they are issued in the local currency of the parent company market and are issued in any and all countries except the home country. However, a foreign market will be unknown to the company meaning they will not have a knowledgeable customer base and the company will be unknown to the market, which means heavy marketing and promotion will be needed to create awareness but most importantly Hutchison Whompoa Limited will have to follow generally accepted accounting principles (GAAP) of that country in which the bonds are issued in. The foreign bank underwriting the bonds will determine the return rate and price at which the bonds are going to issued, Hutchison Whompoa Limited will have to quote a specific amount to be generated by the bonds that means Hutchison Whompoa Limited will not have the freedom to tailor the bond. This option is feasible for Hutchison Whompoa Limited (F.G.Fisher, 1990).

Foreign bonds are there on the contract of the Euro Bonds, these bonds are issued in a specific country syndicated by a bank of that country and are issued in the local currency of that country. Foreign bonds issued in Japan are Samurai bonds and are ...................................

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by Andrew Karolyi, Larry Wynant, Jeff Cram, Peter Yuan Source: Richard Ivey School of Business Foundation 26 pages. Publication Date: September 30, 1999. Prod. #: 999N21-PDF-ENG