Melco Crown Entertainment: Rolling the Dice and Other Ways to Raise Capital Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Q3.) Provide a comprehensive evaluation of potential financing alternatives,

Melco Crown Entertainment is considering different alternative sources of fund in order to finance development expenditure.

Funding types can be short term financing, medium term financing and long term financing. Short term financing can be raised in the form of bank loan, over draft or revolving loan and short term financing is obtained for a period of not more than twelve months but MCEL needs to finance its long term capital expenditure, therefore, short term financing will not be suitable form of financing for the development of its projects. Moreover, the medium term financing can be used in the form of leasing, which is usually used to acquire fixed assets and medium source of finance can be for used for period of among one year to five years and again medium term financing would not be suitable for MCEL. The long term financing raised for a period of not less than three to five years and long term financing can be raised in the form of issuance of equity shares, debentures, and notes payable, however, long term financing is a type of funding that will be suitable for MCEL because it needs to finance its long term capital development. (External sources of finance | Long term, medium and short term)

MCEL has several alternative funding options available in local and foreign market, which include internal funding sources to external funding sources. Initially, the funding requirements can be met through internal resources such as retained profits, however, MCEL does not have positive cash flows and it has no retained profits to finance development of projects. As a second alternate, MCEL can raise finance through issuance of debentures and notes payable that are the second cheapest source of finance because the issuance cost of debt is very low, . In addition, the interest payment is tax allowable expense, therefore, its saves the taxes payments, however, it has some disadvantages as well such as the commitment to pay fixed amount of interest payments. The third source of finance can be raised through the issuance of equity finance but this is the expensive source of raising finance because it involves the selection of underwriter at a predetermined commission and it’s a time consuming process for raising finance. (Pecking Order Consideration)

Local Market (Hong Kong)

Local equity market of Hong Kong is growing at a constant growth rate, which makes the fund raising process easier for MCEL Moreover, Hong Kong is a well developed economy that is very attractive for international debt issuer as well and its market capitalization has remarkably increased between the years 2002 to 2005. This growth level and attractiveness of Hong Kong market has made it one of the world’s largest equity markets.

Meanwhile the local debt market of Hong Kong represents 71% of worlds’ largest banks, and international investors were allowed to invest in Hong Kong market, which further extended the size of debt market and provided more opportunities to local businesses through the use of debt financing in order to meet their businesses’ development needs. Moreover, the debt market is very much liquid and is growing each year by average growth rate of 32% over the 6 years’ period from 2000 to 2005. Additionally, Hong Kong debt market offers lower interest rates on treasury notes payable in comparison with US market interest rate, however, the maturity period of fixed rate debt is not more than 5.3 years.

Pros and Cons of Local Market

Pros

Since MCEL was already listed on local stock market and it was complying with all applicable laws and requirements of local stock market, which will make it easier for MCEL to raise finance from local market.
Moreover, the local debt market had set lower interest rates for treasury notes in comparison with treasury notes of foreign market, which will save the interest cost of MCEL.
Additionally, local market fund raising will not expose MCEL to the foreign exchange risk.

Cons

In local saturated market it would not be easy to raise funds for completion of development projects.
Short maturity period of local corporate bonds made the local debt market less attractive for MECL because it needed the funding for a longer period than the current maturity period of 5.3 years.

Additionally, the competition in local casino market was very much challenging, which made the fund rising more difficult for MCEL......................................

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