Clover Machines Case: Dabbling in International Markets Essay Example

What are general considerations affecting debt maturity? Asset structure is one important factor: the more permanent the assets are, the greater the bias toward long-term funding. From the case it appears that Clover needs more permanent assets. It also appears that funding needs will increase in the future; this again biases us toward a long-term solution. Clover faces continuing large setup costs and its free cash flows (surplus of operating cash flows over investments) may not be sufficient to fund these investments.

4. What are the pros and cons of tapping the Eurobond market? Does Clover fit the profile of firms using this market? What are pre-conditions for successful participation? Clover may face initial hurdles in tapping the Eurobond markets: potential investors may not be familiar with the firm. But Clover does satisfy a key requirement: Eurobond issues are large issues; since Clover needs large amounts of capital, this market is appropriate. Pre-conditions for a successful offering are: (a) well-known firm and (b) large offering.

5. Clover does not have any business in Japan. Given this, does it make any sense to obtain JPY financing? What might be the downside of the attractive rate that is offered? It is interesting that one of the alternatives is a Samurai issue (JPY issue in Japan). Such an issue might be quite valuable if Clover has business in Japan and can offset JPY operating cash flows against JPY debt related cash flows. But even without this benefit, there are advantages to “diversifying” funding sources (a topic discussed in chapters 10 and 11). One problem that Clover needs to consider is the potential for JPY to strengthen;

if this happens, debt service (that is, repayment of interest and principal) will be at disadvantageous currency rates.

6. The report shows no indication or model of how to translate the effects of obtaining floating rate financing. Mr. Bent resolved to ask Mr. Peng to construct a spreadsheet—using plausible scenarios—to demonstrate cash flow consequences of the floating rate note. There are two complications in modeling cash flows related to the FRN. First, market interest rates can change. The coupon is set at EURIBOR + 30bp. The current level of EURIBOR is 4.3%, so this implies that the first coupon payment is 4.6%. Clover expects the rate to diminish somewhat, so one could model a rate such as EURIBOR = 4%. Second, interest payments are denominated in EUR. Clover is a US firm and would be interested in cash flows converted to USD. Spot EURUSD = 1.60 with a plausible range of 1.50 – 1.70.