Vale S. A. has its headquarters in Brazil and the world’s biggest producer of iron and second largest of nickel. Vale has continued growing rapidly despite the global economic downturn in 2007 and is now needing $1 billion of additional capital. This is to help its growth, specifically with its fertilizer business.
Marc Lipson and Vahid Gholampour
Harvard Business Review (UV5630-PDF-ENG)
July 11, 2011
Case questions answered:
- Assuming the bonds are issued at par, what is the hedged cost of funds to Vale (from a U.S. dollar perspective) from the British pound and the euro bond issues? To do so, hedge the British-pound- and euro-denominated annual bond payments into U.S. dollar cash flows and find the implied interest rate. Which issue would you recommend?
- What is the credit spread implied by the three yields anticipated by Vale? How do these compare to average credit spreads in each of the markets?
- Compare the yield offered to Vale in each of the three currencies to yields offered by comparable companies in each of the three currencies.
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Vale S. A. Case Answers
This case solution includes an Excel file with calculations.
Executive Summary – Vale S. A.
Vale S. A. has its headquarters in Brazil and is the world’s biggest producer of iron and the second largest of nickel. Vale has continued growing rapidly despite the global economic downturn in 2007 and is now needing $1 billion of additional capital. This is to help its growth, specifically with its fertilizer business.
Central banks across the world have been keeping interest rates at a record low to support economic recovery. This would lower the real cost of borrowing. Given the high cost of local-currency borrowing in Brazil and the fact that many of the commodities it sold were priced in U.S. dollars, Vale SA had traditionally looked to the U.S. dollar debt market.
However, recently, it seemed that markets other than the United States might look attractive. Vale considers an eight-year bond that could be priced close to par at a coupon rate of 4.375% in euros, 5.475% in British pounds, or 5.240% in U.S. dollars.
We have analyzed the yield hedged, credit spread, and implied real interest rate our bonds would obtain if issued in each of these debt markets. This allowed us to determine the cost, level of risk, and risk appeal to potential investors if issued in a specific region.
After further analysis, I would recommend that Vale S. A. issue bonds in the European market. It has a low hedged yield and the lowest credit spread. Also, because of where the company is headquartered, we are an attractive investment.
Since we provide geographic diversification and offer a high return in a very low-interest-rate environment, investors are selling highly-rated sovereign debt and buying riskier emerging-market corporate bonds.
1.1 The Company
Vale S. A. was founded by the Brazilian government in 1974 and privatized in 1997. Mining became Vale’s focus after its privatization. It sold its steel and wood pulp businesses from 2000 through 2007.
Vale bought many iron ore manufacturing companies during that same time and controlled 85% of Brazil’s 300 million tons of annual iron ore production. Vale also invested in the iron transportation infrastructure.
The company owns three major railway concessions, 800 locomotives, and over 35,000 freight cars and either owns or operates six ports. Most of its mining business is concentrated on iron and in Brazil.
To mitigate the impact of iron ore price changes on its revenue and net income and diversify globally, Vale S. A. launched a diversification program in 2001. Global acquisitions included Resource Corp., AMCI Holdings Inc., and Inco Limited.
By 2009, over half of Vale S. A.’s revenue (56.9%) came from…
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