Jose Luiz Bermudez was the Director of Finance of Grupo Zuliano,
a petrochemical company located in Maracaibo, Venezuela. Since 1972 the
company has been listed on the Caracas Bolsa de Valores but the majority
of shares were controlled by the founding family. Recently, Bermudez had
been considering ways to finance a naphtha processing facility that was
expected to cost $60 million. Most of the equipment was to be imported
from the United States. However the driving force behind the project was
a long-term contract with Ciba, the Swiss specialty chemicals company.
Under the contract, Ciba would commit to purchasing the bulk of the
plant's output at a predetermined price in Euro. Senior management had
suggested Zuliano fund this program by issuing a 5-year Eurobond denominated
in Euro (to match revenues), but initial discussions with European bankers
led Bermudez to conclude that this was not feasible -- Eurobond investors
were simply not familiar with the company and were uncertain about political
risk in Venezuela. The only possibility was an unrated Euro-denominated
private placement, at an estimated rate of 7.125%. Fees were estimated
Following discussions with several U.S. banks, however, Bermudez found
that Grupo Zuliano could borrow five-year dollars locally at quarterly
LIBOR + 1.25 percent, with a 0.75% up-front commitment fee. HSBC Bank tentatively
agreed to enter into a currency swap with the company. LIBOR was 3.9375
percent at the time. HSBC's swap quotations are shown below.
You have heard about this deal, and you want to quickly call the
company with advice and ideas.
Diagram the possible swap with little boxes
How can you compare Zuliano's funding choices?
Can you suggest any other funding alternatives for the company?