Finance Assignment 2 Ricky Chen

Subject Code: FNCE10001 Subject Name: Finance 1

Student ID Number: 693360 Student Name: Ricky Chen

Assignment Name or Number: Case Assignment 2

Tutorial: Thursday 12-1pm Irene

 Finance Assignment 2 Ricky Chen

Evaluation of Rip Curl’s bond investment

To: To whom it may concern

Prepared below is a short note regarding Rip Curl’s bond investment. As an analyst at a top-tier
investment bank, it is my job to evaluate Rip Curl’s interest to issue corporate bonds in Switzerland.
Provided is my evaluation which includes the feasibility of issuing the bonds in Switzerland and the
major risks involved. Furthermore, I have also provided other financing options available to Rip Curl.

Feasibility:

In regards to the decision to raise AUD500 million debts by issuing bonds in Switzerland, it is
possible for Rip Curl if they were to meet the requirements set by Switzerland’s Bond Market (SIX
Exchange). These are listed on the SIX Swiss Exchange known as the SIX Listing Rules. Some of the
requirements is for the nominal value of the bond to be valued at least CHF20 million (around
AUD25 million) and for the company to have existed for at least three years (Walder Wyss Ltd, 2013).
Rip Curl already meets the 2 requirements listed above; however, it is best that Rip Curl hire an
adviser (underwriter) that is familiar with the requirements and rules for listing bonds in the Swiss
bond market to avoid any complications.

However, what's also important that judges whether issuing bonds in Switzerland is realistic is
whether they will be able to find investors interested in Rip Curl. Looking at their financial reports,
Rip Curl's revenue for the past 5 years exceeds AUD300 million and their net profit after tax (NPAT)
as of 30th June 2013 is at AUD14 million (recovering from 2012). These figures should show to
investors that Rip Curl would be able to meet their coupon payments (thus less risky). Another tool to
judge how risky they are is by the earnings before interest, tax, depreciation and amortization
(EBITDA) ratio, taking EBITDA and divides it by interest expensive. This calculates to 3.92 in 2013,
showing the company should generate enough earnings to service its annual debt (Investopedia, 2012)

As a result, it would be feasible for Rip Curl to issue bonds in the Switzerland Bond Market as long as
they meet the requirement to enter the market and show to investors that they have the ability to meet
their financial obligations.
 Finance Assignment 2 Ricky Chen

Risk:

Rip Curl may be drawn in from the low interest rates offered by the Switzerland Bond Market (0.844%
for Switzerland 10 year government bonds compared to 3.92% for Australian 10 year government
bonds as of May 2014, Figure 1), yet there are major risks involved with issuing offshore bonds (SIX
Swiss Exchange, 2014).

Currency Risk:

The major risk Rip Curl may face with issuing bonds overseas (assuming that the corporate bonds are
issued in the Swiss currency Franc as it provides them with better rates) is currency risk. Looking at
this specific example, due to fluctuations in the exchange rate between the AUD and Swiss Franc,
there is the risk that Rip Curl needs to pay a higher or lower amount of coupon and/or the future value
at maturity. For example, if Rip Curl has to pay semi-annual coupons of 100 Swiss Franc, equivalent
to AUD$122.80 (trading at 1CHF to 1.23 AUD as of 3rd May 2014, Figure 2). If the Swiss Franc was
to appreciate throughout the years so that 1CHF would trade at 2AUD (as the Swiss Franc became
stronger, it is able to buy more of AUD for 1CHF), Rip Curl would need to pay semi-annual coupons
of AUD$200. This could also result in Rip Curl's gain if the Swiss currency was to depreciate,
lowering Rip Curl's coupon payments. Either way, issuing bonds offshore is bound to face currency
risk.

Credit Risk:

Rip Curl also faces credit risk which may cause changes in their rates. Credit ratings are determined
by the company's ability to operate and meet their financial obligations, evaluated by credit rating
companies such as Standard & Poor's and Moody's (Figure 3). Assuming that Rip Curl issues bonds
with floating-rates, if they were seen as more risky, lending institutions may change rates accordingly.

Interest Rate Risk:

Issuing bonds overseas are also subject to interest rate risk.

Fixed Coupons: If interest rates were to change, you may be stuck paying a higher or lower
fixed coupon rate.

Floating Coupons: Interest rates may change and you may be subjected to pay a higher or
lower coupon rate than initially.
Finance Assignment 2 Ricky Chen
 Finance Assignment 2 Ricky Chen

Alternatives:

There are alternative financing options available for Rip Curl to avoid facing the risks involved with
issuing bonds offshore.

Diversification:

Diversification involves combining a range of different funding source to gain the capital
required. These funding sources could include the ones mention below or other ones:

Equity Funding:

Equity funding involves the sale of shares in the enterprise to raise capital. Rip Curl
could even get an initial public offering (IPO) by going public.

Syndicated Loan:

Syndicated loan involves borrowing from a wide range of investors rather than just
one investor, thus gaining the ability to borrow a larger amount.

Domestic Bonds:

An alternative for Rip Curl is to issue bonds domestically. Despite the high interest rate
(3.92%), Rip Curl would be able to avoid facing currency risk, which is a major risk of issuing bonds
overseas. Moreover, Rip Curl may be more used to Australia's bond market and their regulations thus
making the whole transaction a lot easier.
 Finance Assignment 2 Ricky Chen

Securitisation:

Securitisation refers to the process of securitising illiquid assets and selling them to investors
(Hunt & Terry, 2011). In this process, we are paid cash from the buyer of the security. Rip Curl has a
total of around AUD$74 million in non-current assets, $25 million of which are property and plant
equipment. This might not get Rip Curl their AUD500 million but it is one of the financing options
available for them, selling off some assets in Australia and expanding overseas.

The most attractive and feasible option for Rip Curl would be diversification. It allows them to
borrow money from a wide range of investors and methods thus avoiding any possible complications.
By borrowing money at smaller amounts, the risk involved may be reduced with each potential
investor thus overall Rip Curl may also gain.

Conclusion:

Issuing AUD500 million of corporate bonds in the Swiss Bond Market is quite feasible as long as Rip
Curl follows and meets the requirements to enter the market. However, due to a range of risks
involved, Rip Curl should pursue an alternative financing option, with the best alternative to be
diversification (which involves funding from a range of methods).
 Finance Assignment 2 Ricky Chen

Bibliography:

Corporate Bonds: An Introduction To Credit Risk, Investopedia. Available from

<http://www.investopedia.com/articles/03/110503.asp> [18th August 2012]

Ben, H & Chris, T, 2011. Financial institutions and markets, 6th edition, Australia.

Debt capital market in Switzerland: regulatory overview, Walder Wyss Ltd. Available from
<http://www.walderwyss.com/publications/1280.pdf> [20th Feb 2013]

Regulations and Publications, SIX Swiss Exchange. Available from <http://www.six-swiss-

exchange.com/issuers/bonds/regulation_en.html> [3nd May 2014]

Rip Curl Group Pty Ltd Financials, IBIS World. Available from
<http://clients1.ibisworld.com.au.ezp.lib.unimelb.edu.au/reports/au/enterprisepremium/financials.aspx
?entid=3538> [June 2013]

What Is A Corporate Credit Rating?, Investopedia. Available from

<http://www.investopedia.com/articles/03/102203.asp> [14th January 2014]

XE Currency Charts (CHF/AUD), XE. Available from

<http://www.xe.com/currencycharts/?from=CHF&to=AUD&view=1W> [3rd May 2014]

Yield Curves, SIX Swiss Exchange. Available from <http://www.six-swiss-

exchange.com/services/yield_curves_en.html> [3rd May 2014]