avi
Uploaded by
22 SLIDES
311 VUES
220LIKES

Credit Enhancement with Gold-Denominated Depositary Shares

DESCRIPTION

This study explores how Freeport McMoRan used innovative financial engineering through gold-denominated depositary shares to improve credit quality, reduce costs, and avoid wealth transfer issues. The analysis considers various scenarios related to asset substitution problems and the benefits of bundled hedges.

1 / 22

Télécharger la présentation

Credit Enhancement with Gold-Denominated Depositary Shares

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Credit enhancement through financial engineering: Freeport McMoRan’s gold-denominated depositary shares

  2. Abstract • 1993~1994，McMoRanissued two series of gold-denominated depositary shares. • Enhance the credit quality and reduce the costs. • Two superiorities: 1. Avoid wealth transfer to senior bondholders. 2. Mitigate the asset substitution problem.

  3. Freeport McMoRan Copper and Gold Inc.

  4. Introduction • Freeport McMoRan Copper and Gold Inc.(FCX) needed to invest heavily to expand mine capacity. • FCX management did not want to issue new equity. • New debt issues would put further pressure on FCX’s debt rating(low B1 by Moody).

  5. Introduction • The Gold depositary shares issued by FCX are similar to a debt instrument that has all interest and principal payments in gold. • The positive correlation between the value of the firm and the value of the securities. • An embedded derivative that serves to hedge the exposure to gold price risk.

  6. Introduction • Enhance the credit quality and enable FCX to finance its expansion at a lower cost.(Scenario D) • Gold depositary shares can not be replicated by conventional hedging strategies. (Scenario E) • Prevent wealth transfers to senior bondholders that arise in the case of a conventional hedge. (Scenario D & Scenario E)

  7. Introduction • Shareholders have an ex-post incentive for asset substitution in the case of a conventional hedge.(Scenario F) • A bundled hedge significantly reduces asset substitution problem.(Scenario G)

  8. Scenario set • The gold mining firm has 1.97 million ounces of gold reserves and plans to expand to 3 million ounces. • The firm’s value is linear in the price of gold. • Gold prices are distributed uniformly over the range of $100 to $500 per ounce. • The firm has $500 million in senior debt and need to raise $251 million for the expansion. • Bankruptcy cost = $50 million • Risk free rate = 0

  9. Prior to expansion 100.0

  10. Scenario A 253.4

  11. Scenario B

  12. Scenario B 166.67

  13. Scenario C

  14. Scenario C 183.3

  15. Scenario D (gold-linked bond) • Gold-linked bonds of face value 1.0 million oz • 250 < 300

  16. Scenario D (gold-linked bond)

  17. Scenario E 500.0

  18. Scenario E (Firm level risk management)

  19. Gains from ex post unwinding of the hedge

More Related