Shanghai Motors

For exclusive use at International Management Institute - Kolkata, 2015

9-204-025

REV: SEPTEMBER 22, 2003

MIHIR A. DESAI

MARK F. VEBLEN

The Refinancing of Shanghai General Motors (B)

Newman did, in fact, win approval to undertake a refinancing of SGM. The transaction was

completed on June 6, 2001 about six months after receiving the SGM Board approval to proceed.

Jennifer Li was promoted to SGM Treasurer in April 2001 and worked closely with representatives of

the GM Regional Treasurer’s Office and the SAIC Finance Company to ensure that the deal was in

place before the expiry of availability of the old facility. The new terms provided SGM with

significantly greater operating flexibility, lower foreign exchange risk exposure, and lower interest

costs.

Leading up to the transaction, Newman and Li had worked closely with bankers from Citibank in

Hong Kong for several months exploring the option to refinance the full $821 million USD equivalent

credit facility, of which $160 million had been drawn down in USD into a smaller facility. Since

Newman had been able to borrow $30 million1 in U.S. dollars from Industrial Commercial Bank of

China (ICBC) at Libor plus 65 on an unsecured, subordinated basis, he pushed for a new facility that

was not only cheaper but also more flexible and provided a greater ability to manage foreign

exchange exposures.

Furthermore, Newman now had a second year of audited financial statements. Because of the

better than expected cash flows in the initial years, Newman did not need to refinance the full

amount and preferred to reduce the total debt outstanding, if possible. Shrinking the financing size

closer to a conservative estimate of SGM’s peak borrowing needs was attractive to banks, which were

loath to extend credit that would not be drawn down. This was particularly true for the U.S. dollar

component that would be entirely drawn down immediately.

Finalizing the Refinancing Terms

Citibank acted as lead...