International Corporate Finance: Value Creation with Currency Derivatives in Global Capital Markets, + Website

CASE STUDY 6.1

Brazil Rede Globo's Short-Term Funding

This case study accompanies Chapter 6 of International Corporate Finance.

On an early Monday morning, Dr. Guadalupe Philips was reviewing pro forma cash-flow statements in preparation for an upcoming staff meeting of the treasury department. Guadalupe would first consider various proposals before deciding on how to fund the firm's working capital.

Dr. Philips was the newly appointed treasurer of Rede Globo Ltd., the Brazilian media conglomerate headquartered in Rio de Janeiro. Rede Globo was a producer of TV programs (mostly telenovelas) and operated several cable television channels, primarily in Portuguese and catering almost exclusively to the Brazilian market. In this cash-flow budget, Guadalupe and her staff had estimated a net short-term funding need in the amount of 250 million reals (BRL) for the next six months. Guadalupe Philips' easy solution would be to take out a BRL 250 million, six-month loan from Banco Pactual in Rio. Rede Globo had done business for years with Banco Pactual, and a six-month loan from the bank seemed to be a natural way to proceed. However, with the real's newfound strength and its near-full convertibility, Dr. Philips intended to consider all options, including international ones.

First, should Rede Globo borrow reals in Brazil, as in the past, or should it borrow in the somewhat cheaper euro-real money market? Should the offshore market for real be considered along with the onshore real money ...