HUTCHISON WHAMPOA'S FINANCING STRATEGY PRIOR TO JUNE 1997
A financing strategy is integral to an organization’s strategic plan. It sets out how the organization plans to finance its overall operations to meet its objectives now and in the future. Hutchison, like other large firms in Hong Kong, relied heavily on internally generated funds to fuel growth. Having reserves of 67,994m (more than twiceof operating expenses in 1996), it is stable enough to continue without external funding, indicating a conservative financing strategy.
Debt ratios for 1995 & 1996 are 46% and 42% respectively, showing HWL’s relatively medium dependency on debt . With approximate interest coverage ratio of 4.96 ...view middle of the document...
It is an appropriate capital structure to adopt when projects funded are relatively shorter in duration.
ADVANTAGES & DISADVANTAGES OF FINANCING ABROAD
International financing offers significant advantages for Hutchison Whampoa, given its status as a highly-diversified company with substantial global interests across many parts of Asia and Europe:
I. Lower Borrowing Costs:The most apparent advantage would be the ability to take advantage of more competitive interest rates than those offered in the Hong Kong market (although, according to the interest rate parity condition, there should not be such arbitrage opportunities after the requisite currency adjustments are performed).
II. Better Issuer-Investor Matching: By venturing into overseas capital markets (which may be more liquid than the Hong Kong market), Hutchison will be able to broaden its investor base and sources of funding. This can arguably lower the cost of capital if Hutchison is able to find a capital market in which a better match can be made between: (i) its own funding needs, and (ii) the risk appetites or tenure preferences of investors within the foreign financial market. Hutchison (presumably) faces little demand in the Hong Kong market for longer-term bonds (longer-term markets tend to develop after shorter-term markets), which it needs in order to fund longer-term projects to stimulate growth;thus the overseas markets will probably prove more attractive. Larger issuances (e.g. jumbo bonds above US$1B) are also possible in certain offshore financial markets, thereby allowing Hutchison to raise more funds for the given fixed costs of arranging bond issues.
III. Hedging Opportunities:Hutchison’s extensive overseas operations logically indicate that a portion of the company’s revenues will be received in foreign currencies. It would therefore make sense for Hutchison to issue bonds denominated in a matching currency so as to provide a natural hedge for these cash flows. These are typically issued either as foreign bonds in the market of the currency of denomination, or in the Eurobond market.
IV. Greater Flexibility:Overseas capital markets can sometimes also provide firms like Hutchison with greater flexibility by increasing the range of financing options available to themover and above what the Hong Kong market provides – such as more sophisticated debt instruments that may be better suited to the needs of the company.
However, there are also some disadvantages or risks inherent in overseas financing, the principal of which is the company’s exposure to currency risk (assuming the bonds have to be repaid in the foreign currency). Should the exchange rate between HKD and the currency...