In the case study, Hutchison Whampoa considers strategies for its long-term capital structure. It had ambitious growth plans in multiple business sectors in different geographies. It faces the problem of maintaining the growth trajectory it has established in recent years and requires external financing of either USD 1 or 3 billion which it has yet to determine. Due to various reasons, Hutchison was inclined to explore other financing options. In particular, the company was debating the benefits of a Yankee Bond Offering. Also, one other option is tapping into the different bond markets which have yet to be analyzed. Ultimately, HW would also have to decide on a capital structure that would be most pertinent to its future financing needs.
G. Andrew Karolyi, Larry Wynant, Geoff Crum, Peter Yuan
Ivey (9A99N021) (99N021-PDF-ENG)
09/30/1999 (Revision: 01/21/2010)
Case questions answered:
- Assume Hutchison Whampoa (HW) is considering external financing of either US$1 billion or US$3billion in 1996. Assume that new equity can be raised at $48 a share and that a long-term debt issue will carry an interest cost of HIBOR plus 70 basis points (bps). How would an equity or debt issue impact on HW’s financial position and performance? Assess HW’s capital structure in light of its future financing needs.
- What bond rating do you think Hutchison Whampoa will be able to obtain from Standard and Poor’s or Moody’s?
- What kind of capital structure would you propose to HW and why?
- A summary of the financial statement for HW for the years 1996 to 2014 is provided in Appendix I of the excel file for Hutchison Whampoa (available on IVLE). These figures are taken from HW’s annual reports. To provide a benchmark to compare HW’s capital structure, a summary of the financial statement for PSA (Port Authority of Singapore Corporation) is also provided for the same time period. Assume that PSA and Hutchison Whampoa are in the same industry. Comment on the changes, if any, in HW’s capital structure over this period.
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Case answers for Hutchison Whampoa Limited: The Capital Structure Decision
1.1 Case Summary – Hutchison Whampoa Limited: The Capital Structure Decision
Hutchison Whampoa (HW) faces the problem of maintaining the growth trajectory it has established in recent years and requires external financing of either USD 1 or 3 billion which it has yet to determine. External financing options that are available include a syndicated bank loan1, a bond issue, and a seasoned equity offering.
As HW has not yet obtained a formal rating from both Moody’s and Standard and Poor’s (S&P), the analysis of a bond issue will have to take into consideration the potential bond rating from the credit rating agencies. Additionally, there is the option of tapping into the different bond markets and it would have to be analyzed as well. Ultimately, Hutchison Whampoa would also have to decide on a capital structure that would be most pertinent to its future financing needs.
1.2 Future Financing Needs
HW’s capital commitments in 1995 stand at an approximate total of USD 3 billion2, with those already contracted for at approximately USD 829 million4. While it may seem that an external financing solution of USD 3 billion is ideal for Hutchison Whampoa to sufficiently meet its planned capital expenditure, the amount of external financing to be obtained will be constrained by HW’s ability to service the debt if it is a bond issue, or HW’s decision to accept a possible dilution of control by its major shareholders if it is an equity issue.
We will perform scenario analyses of 1) 100% equity issue and 2) 100% debt issue to assess the impact on Hutchison Whampoa’s financial position and performance…