Grupo Zuliano

A Case Study
Prof. Ian H. Giddy, New York University

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 at 1.50%.

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.

  1. Diagram the possible swap with little boxes
  2. How can you compare Zuliano's funding choices?
  3. Can you suggest any other funding alternatives for the company?


Years Currency Swaps, Euro Fixed Annual vs 3-Mo USD Libor Interest Rate Swaps, USD Fixed Annual vs 3-Mo USD Libor
2 3.74 - 3.77 3.46 - 3.49
3 3.99 - 4.02 4.02 - 4.05
4 4.23 - 4.26 4.40 - 4.43
5 4.45 - 4.48 4.67 - 4.70
7 4.84 - 4.87 5.07 - 5.10

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