Hoang Anh Gia Lai (HAG) is a leading real estate company in Vietnam focusing on developing residential and commercial properties. It planned on issuing a debt instrument in the form of senior notes in Singapore. The company foresaw that it would have an US$80.7 million net proceeds. However, the issuance of the senior notes may raise several questions of interest that need to be addressed.
Sundaravaradhan Venkatesh
Harvard Business Review (W13368-PDF-ENG)
September 09, 2013
Case questions answered:
- What is the cost at which HAG is borrowing through the Singapore note issue (taxes to be ignored)?
- What is the likelihood that HAG will be downgraded within a year from its B rating from Standard and Poor’s?
- Is the level of borrowing of HAG, after the note issue, going beyond the optimal level of borrowing (often mentioned in textbooks but never clearly defined)?
- How will the risk to HAG’s equity be affected as a result of the issue? Will the stock prices go down? Is it time for the brokerage firm to offload its equity holding in HAG?
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HAG’s Singapore Note Issue Case Answers
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Hoang Anh Gia Lai Group (HAG)
- Large Real Estate Company in Vietnam
- Focuses on developing residential and commercial properties in Ho Chi Minh City
- The business conglomerate also deals in hydroelectric power, rubber plantations, and even owns a football club!
- The outlook for the group looks strong:
- Vietnam is growth in 2010 at 6.7% despite the 2008 economic recession
- The average selling price of residential properties in Ho Chi Minh City has risen from US$1,200 to 1,455 per square meter in 2010 despite an increase in the supply of residential property overall.
Notes Issue in Singapore
- Planning to issue US$90 million 5-year (redeemable) senior notes at 9.875% interest
- Interest payable half-yearly
- Reasons for raising capital in Singapore as opposed to Vietnam:
- Lower than the cost of borrowing from Vietnamese banks, which ranged from 13.5 to 16.5% p.a. in 2010 for VND-denominated loans
- Vietnam’s bond market is not well developed and is usually issued to a single bank
How this capital will be spent
- Finance hydropower and rubber plantation business
- Fund operating expenses
Risk Factors to the HAG Note Issue
- Volatility of company cash flows
- Exchange rate risk
Brokerage firm’s concerns
What is the cost at which HAG is borrowing through the Singapore note issue?
What is the likelihood that HAG will be downgraded within a year from its B rating from Standard and Poor’s?
Is the level of borrowing of HAG, after the note issue, going beyond the optimal level of borrowing?
How will the risk to HAG’s equity be affected as a result of the issue? Will the stock prices go down? Is it time for the brokerage firm to offload its equity holding in HAG?
1. What is the cost at which HAG is borrowing through the Singapore note issue (taxes to be ignored)?
Type of cost incurred
- Coupon Payment of 9.85% paid Semi-annually
- Cost of Currency Exchange Risk
- Cost of Callable Bond Risk to Bondholders
- Cost of Tax (To Be Ignored In This Case Study)
Base Scenario
- HAG redeems…
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