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Vale S.A. Case
1. What is Vale’s business and what currencies does it generate revenue in? Given its previous debt issues does appear Vale concerned about currency repayment risk? Vale is a mining company that produces iron ore and operates the iron transportation infrastructure. It generates revenue in Brazilian reals. It doesn’t seem that Vale concerned much about currency repayment risk. For the past 8 years, almost all Vale’s corporate bonds were issued in USD (Exhibit 4). The USD/BRL exchange rates have been steady and stable (Figure 3). There doesn’t appear to be a big risk that the USD will appreciate against the BRL. 2. Why is Vale choosing coupon rates on the three candidate bonds that are different? That is, why not just have one coupon of say 5% for all the bonds? The three currencies have different risk free rates (Figure 1a). They also have different credit spreads for corporate issuers in the same credit rating as Vale (Figure 1b). The coupon rates on the three candidate bonds are calculated based on the risk free rate and the typical credit spread for each currency. Since the risk free rates and credit spreads differ among the three currencies, the coupon rates should also be different if Vale wants the three bonds to be of similar value. Figure 1a shows the government bond yield (risk free rate) of Germany. We choose Germany to represent EUR because Germany is the largest and the controlling economy in the European Union. The 8-year interbank interest rates in Exhibit 3 also indicate the risk free rates for the three currencies. Figure 1b shows the typical credit spreads for BBB rated corporate issuers. Vale is a BBB+ rated issuer (Exhibit 5), which is very close.

3. Given that the Vale bonds will be issued as Eurobonds, what will be the expected debt repayments schedules and amounts for each of the three bonds? Eurobonds follow annual coupon payment.

4. Provide an analysis of the expected value (in terms of Reals) of the...
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