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There are some at Robinson who recommend that the company borrow the needed funds in
Colombia. That way, if a new government seized the assets, the company could default on the loan. If
the exchange rate guarantee were ended, the loan would offset the assets and thereby lessen or
eliminate any accounting risk.
Lesson: We saw a venture with risk but also with exceptional returns. The company carefully
considered the potential risks and looked for ways to lessen this risk. It performed the economic
analysis in the same manner as it would for any project in the United States.
Unknown Rental Cars Borrowing Case: January 1, 1985
Dad: Rodney, let me tell you a true story about a major U.S. corporation. I‟ll change a few details and
the name of the company. The case was told to me by someone who lived it. It was set way back in
1985, but the case is as relevant today as it was then. In many ways it is the same as your investment
in the English CD.
It was December 1984 and Unknown Rental Cars needed to borrow $200 million to finance the
purchase of an Unclear Airlines company. The assistant treasurer just made a recommendation about
the choice between borrowing in the United States in U.S. dollars or in Japan in yen (¥ or JPY). The
loan would begin on January 1, 1985, and end on December 31, 1989.
As background, Unknown owned Cheapy Hotels. It was buying Unclear Airlines from a major
private equity firm that had purchased it out of bankruptcy. Unclear Airlines would generate about
50% of the total revenue and the remainder was to be evenly split between Unknown Rental Cars and
Cheapy Hotels. All were worldwide service companies that generated revenue in many countries and
currencies, mainly in the United States, Canada, Latin America, and Europe.
If the loan was in U.S. dollars in the United States, company policy required the use of a specific
investment banker. This investment banking firm estimated terms of the United States loan as follows:
The interest rate would be 11% per year paid semiannually in December and June for five years. The
principal of $200 million would be repaid at the end of the five years. There would be a one-time
underwriting fee of approximately 0.5% to be paid when the funds were received.
Exhibit 7.21 Amount of yen purchased by $1.
Source: FXHistory © 1997-2008 by OANDA Corporation.
A leading Japanese bank was expanding into the United States as it fulfilled its strategic objective
of becoming a worldwide institution. It offered a loan with the interest and principal denominated in
yen. The interest rate was 5%, and there were no up-front fees. Both the U.S. and the Japanese loans