Carrefour S.A. Case Study

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International Borrowing at Carrefour S.A.

Briefly discuss the background of Carrefour SA and its financing practices. What are the borrowing alternatives? Carrefour S.A. is operating as a chain of hypermarkets, combining a supermarket, drugstore, discount store and gas station. Carrefour is originating from France, however, during 40 years it has expanded its operations to ten other European countries, six South and North American countries and nine Asian countries. The largest sales and profits of the company come from operations in France. But only in 2001 sales coming from France were less than from foreign operations. Carrefour management had generally financed company growth through securities denominated in the currency of business operations. More than 90% of borrowings are in Euro, and the remaining 10% - in other currencies (US dollars, Argentine peso, Swiss franc, etc.). Foreign currency exposure was generally hedged through currency-forward contracts. Now Carrefour needs to borrow EUR 750 million. The Carrefour management has to decide in which currency the company should borrow, and if all of the borrowing should be via bond issue.

Using the parity forward rates calculate the cost of borrowing in CHF, GBP and in USD. In order to identify the internal rate of return (IRR) for each of currency options, we have projected cash flows in each currency based on the respective coupon rate. In order to translate cash flows in euro and make them comparable, we have calculated the forward rates for each currency for the 10-year time horizon. To determine the forward rate the covered interest parity was used, where: F=S(1+rd)(1+rf)

In the result we derived the following forward rates (see Excel file for calculations):  | Forward rates|
 | British pound| Swiss franc| U.S. Dollar|
1-year| 1,6044| 0,6721| 1,0061|
2-year| 1,6054| 0,6741| 1,0097|
3-year| 1,6052| 0,6752| 1,0134|
4-year| 1,6044| 0,6758| 1,0159|
5-year| 1,6031...
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