Loan structuring report of billabong international limited (bbg)


1.0 Background

1.1 Company History

Billabong International Limited (BBG) was established in the year 1973 in Australia's Queensland by its present director Merchant Gordon (InvestSMART 2011). According to the statistics availed on its website, its core operations include production, distribution and retailing of garments, accessories, collections and wetsuits (Billabong International Homepage 2011). As of 2011, the company had carried out aggressive marketing strategies and established an active presence across 60 countries (MSN Finance 2009). This diverse geographic expansion has greatly reduced the seasonality of their earnings thus in the process giving the company a competitive edge over its major rivals (Nike and Quicksilver).

2.0 Introduction

The negative effects associated with globalization have heavily affected the operations of multinational corporations, Billabong included. It should be noted that in its efforts to overcome the challenges associated with economic crunch or inflation, the Australian based firm had previously borrowed unsecured bilateral loans to refinance its activities and improve on its liquidity (Interactive Investor 2008).

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It is from the need to carry out its expansion program that this paper proposes the following suitable funding facilities for this multination corporation. In the initial stages, the study went into detail to identify and describe the proposed funding facilities.

The study then proceeded to highlight all the aspects involved in the funding facilities previously identified. It should be noted that to ensure on the validity of the figures stated in this study, the author adopted and implemented the guidelines as stipulated by a renowned financial institution in Australia -Commonwealth Bank of Australia's (CBA).

In addition, the study used the guidelines to identify a number of risks which affect both the borrower and the lender. Each identified risk was followed by a recommendation of its mitigation factor.

Lastly, it should be noted that while preparing this loan proposal, Billabongs' previously availed up-to-date financial statements were regularly referred to especially when studies were carried out to determine the amount of funding which the surf wear firm was liable for from the lenders.

3.0 Definitions, Abbreviations and Interpretations

The following terms have been frequently referred to in this study and as such there was need to state their abbreviations, meanings or interpretations.

  • CBA: Is a shortened acronym for Commonwealth Bank of Australia, the reference lending financial institution in this case study.
  • BBG: The acronym represented Billabong international Limited. The acronym was chosen because it is the firm's registered and popularized stock exchange name.
  • Default: The term will refer to any event constituting dishonouring of loan servicing.
  • Disbursement Date: Borrowers designated date/day.
  • A$: the lawful money of Australia; which will be our reference form of currency.
  • Indebtedness: amount that BBG is or will be liable to pay as a debtor or borrower of the loan.
  • Interest period: the time starting after the proposed disbursement funds to BBG.
  • Australian Banking Days: will refer to weekdays (Monday to Friday).

4.0 Proposed funding facilities for Billabong International Ltd

4.1 International Bonds

4.1.1 Foreign Bonds

BBG Chief Financial Officer should be informed that foreign bonds can constitute a suitable funding facility for the expanding firm. This is the case because the multinational company can offer its bonds to foreign markets that offer low interest rates on their currencies. It should be noted that the Billabong international being an Australian firm stands to lose a lot of funds if it adopts to sell its bonds on the local Australian market as a result of the high interests and high yields associated with trading on the Australian market (Madura 2008, p. 501). As such, BBG can fund its activities by offering its bonds in foreign markets that are known to charge low interests.

Beside, as Kyle (2010) noted, the multinational firm stands to add foreign contents on its portfolio and as such act as alternative strategy for investment. This is because the purchasers of foreign bonds are usually foreign residents.

4.1.2 Eurobonds

Billabong International can also unite with other investment banks and enjoy attractive tools of financial tools as offered to foreign markets in the form of the Eurobonds. For instance, the Australian based company can decide to offer its Eurobond denominated in say Japanese Yen to the US market. In this case, the bond though being Australian, will retail in the denominated Japanese Yen.

4.1.3 Global Bonds

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Unlike the foreign and Eurobonds, BBG can decide to issue global bonds in a similar currency as the issuing country. For instance, it might decide to issue the global bonds in the Australian market. In this case, the bonds will retail in the recommended Australian dollar.

4.2 Leaseback/Finance lease agreement

BBG can purchase some of its assets in full and then adopt the option of funding its activities using equipment leaseback. In this case, the company can sell its asset back to the lender, who will in turn provide the company with the needed funds. In such a case, the purchased assets will be leased back to lender on hire purchase terms or special lease agreements. A good example of this mode of facility funding would be BBG buying a complete store, in say USA, for an estimated $50 million and since the company may not be in a hurry to occupy the store, it may attach an annual rent of $10 million for this same store to a lender. In this case, the lender can decide to rent the premise and then provide BBG with a 100% payment. In this case, BBG will have recovered its costs and will still be the rightful owner of the premise after the elapsing of the 10 year lease period.

4.3 Commercial Loans

Likewise, the company can decide to forward its application for traditional methods of asset funding. In this case, the proposed assets must possess intrinsic values throughout their life, be movable and identifiable.

4.4 Factoring or invoice discounting

Moreover, BBG can decide to adopt the factoring method whereby the company may seek the services of a reputable debt collector firm to collect all its widely dispersed international debts. In this case, the company will retain the ownership of its debts.

Contrary to the above, the company may negotiate with a lender for the sale of its debts or sales invoices. In addition, the company may as well relinquish the ownership of its debts to the lender at agreed upon fees. In this case, the lender will issue it with the proposed and approved amounts to fund its activities (Lincoln Finance Ltd 2011).

4.5 Swaps

In using swap deals, BBG can agree to engage in contractual engagements with other parties and exchange their cash flows say at periodic intervals. The following are the modes of swaps which can be used to fund its operations.

4.5.1 Currency Swaps

Currency swaps will see BBG engage in contractual agreements that will see it exchange various denominational currencies for the purposes of funding its expansion operations. For instance, if the company may opt to expand its British operations with say 10 million UK pounds, the Australian firm can decide to borrow the amount in an economy where they are well established and exchange the amount based on the lending institution's denominational currency. An ideal scenario for this multinational firm would be borrowing in the US market where the company has emerged as the leading surf wear provider and diverting the borrowed funds to the UK. In this case, the US dollars will be exchanged for UK pounds.

4.5.2 Interest Rate Swaps

In the interest rate swap deals, Billabong International can obtain best offers from swap banks which can act as brokers between it and the other partner wishing to engage in borrowing opportunity. For instance, if the company wanted to raise A$20 million at a floating-rate interest rate of 10% for 10 years using Eurodollar bonds, then the swap bank can decide to engage in this contract as a partner or a dealer and find another firm with a different borrowing opportunity (for instance raising A$20 million by issuing Eurodollar bonds at a 5 year fixed rate). In this case, the swapping bank can either accept any of their currency swaps or can decide to negotiate with the two borrowing partners to match their expectations.

In the late 2000's, quotations for interest swaps in Euros have attracted bids ranging from 3.82-3.85 for a 10 year period. (Resnick 2007). The company should note that the swaps are valued based on the differences existing between floating-rate boxed and fixed-rate bonds.

4.6 Debt Refinancing

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Billabong International can adopt and implement this mode of funding by applying for normal loans in any financial institution. In this case, the company, having identified the refinancing of its previous loans (say bilateral loans) as a priority, can approach a reputable lending institution and negotiate for better lending terms. The lender will then offer the requested loan to clear the pending debts. The lender will then in return offer the borrower an extended period to clear the debt. This has the benefit of the lender servicing the debt at her manageable level.

5.0 Details of the Aspects Involved in the funding facilities

The following aspects accompany all the identified funding facilities and as such there was need to fully detail the issues involved in them. CBA guidelines were constantly referred to in their assessment.

5.1 Preliminary evaluation of a funding request

In the initial stages, the lender having received a funding request from the borrower, reviews the completed application form and draws up a summary of the reasons upon which the request is made. Table 1 below is an example how modern day financial institutions analyse funding requests.

Use of Funds

Total Funds Needed

Loan Request

Offset bilateral loans



Expansion programme






Table 1 showing the proposed loan breakdown

5.2 Assessment of Repayment Ability

5.1.1 Debt worthiness (leverage)

It should be asserted that one of the most valuable criteria adopted by the lending institutions is the determination of borrowers leverage (debt worthiness) status. According to the statistics from BBG's last financial results (as at 12/31/2010), the following is a detailed analysis of how this aspect can be determined.

The company had a total long term debt of $570million which is equivalent to A$536million (MSN Money 2011). This means that if BBG had initially placed a funding request of A$ 600million, the company's proforma debt will be calculated as follows:

Starting Total Debt (Based on recent F/S)

A$536, 000,000

Add new money (proposed CBA loan)


Proforma debt


Table 2 depicting BBG's debt worthiness

It should be noted that the company had a beginning equity of A$1.1 billion as at the end of 2010. This therefore means that its proforma equity is A$1,100,000 plus the earlier accrued profit (A$ 250, 000000). This sum up to A$ 1, 350,000.

If we divide BBG's proforma debt to its proforma equity, we get an estimated 1:1 ratio. Since CBA's guidelines stipulate for 3:1 or less, then their loan structure is within the CBA's set guidelines. However, before the approval of the proposed figure based on this statistic, BBG's financial strength can also determined based on the following measurement variables:

5.1.2 Cash flow analysis

Most research have evidenced that the ability of any borrower to service the proposed loan from the borrower's resultant earnings and cash flows is a critical key factors that should always be considered in the loan structuring process (Marks 2005, p.290). Based on the available CBA banking guidelines, the following method has been regularly utilized by banking institutions (CBA included), in determining the repayment ability. The calculations involved were based on BBG's latest financial results (as at June 30, 2010)

Based on the statistics above, Billabong International has inadequate cash flow to service both the existing and the proposed debts. This is because the Commercial Bank of Australia stipulates that the debt service coverage ratio should not be less than 1.25 times in any last ending period and at least 2.0 times in any interim period. All of BBG's debt coverage ratios fall below the recommended ratios. This means that if CBA was to go ahead and issue it with the requested loan, then the company is bound to struggle to service this particular debt. As such, the company can only be awarded the loan if it reduces its request from A$600million to an ‘affordable' figure, say of A$200 million.

5.1.3 Best Case/Worst case analysis

In further assessing the risks associated with lending the proposed A$600 million to BBG, the following best case and worst case analysis was conducted on its financial statement. The table below shows the company's last financial results

Table 4 showing BBG's last financial results (Adopted from MSN Finace 2011).

In scenario 1 of a best case analysis, assuming that BBG's revenues increase by 20% and that all its items are directly affected by these increase in sales, this will mean the company's succeeding proforma income statement can be projected as follows:

Table 5 showing the projected best case analysis

From the scenario displayed above, it should be noted that the company's net income will not sufficiently service the proposed A$600million loan in the recommended five year period.

Likewise, if we were to perform a worst case analysis and reduce the revenues by the same margin of 20% for the succeeding year, the following Table 6 depicted the results of the findings:

Table 6 depicting the projected worst case analysis

From the results shown above, it's obvious that the company lacks the strength to service the proposed loan. The figures highlight that the company can only be able to comfortably forward an annual payment of say A$50 million. This means that if it is awarded the proposed 600 million, then a very lengthy period of 12 years should be awarded to it as the repayment period. This should be stated in the lending institutions guidelines. Finacially sound companies can fetch high funding from offering international bonds. For instance, India's largest private lender ICICI Bank had announced (on May 20, 2011) that it had raised a whooping $1 billion through issuing international bonds for a 5.5 year period (Moneycontrol Bureau 2011). These bonds had been offered from its Dubai branch to the US and UK markets had had a coupon of 4.75% and issue price of 99.665%. Due to reputation, the bonds had been interestingly oversubscribed by $2.7 billion (Moneycontrol Bureau 2011).

5.3 The proposed repayment/pricing pattern

Based on the analysis done above, BBG's weak debt coverage service and unhealthy ‘best and worst' scenarios reveal a lot of weaknesses in its financial capabilities. As such it is herein proposed that the lender and the borrower agree on an acceptable and affordable competitive period for the repayment of any disbursed funding amount.

For the purposes of bond funding, the prices of bonds are determined the current market conditions and the borrower's financial stability.

5.4 Collateral

Based on MSN Finance (2011), BBG possesses property, equipment and a host of plants spread in the 60 countries. In addition, the company has an insurance that can be used as collateral. Since all these items fall with the stated standards for most lender's collaterals, the following collaterals, based on CBA's current calculations, can be offered for its proposed loan of A$ 600 million.

Table 7 showing the calculation of the proposed collateral (Up-to-date figures adopted from MSN Finance, 2011).

Based on these statistics, BBG appears to have inadequate resources to guarantee its proposed loan of A$ 600 million. From the information above, the company's assets, based on their current market price, can only guarantee 462 million, 138 million short of the proposed loan. As such, CBA stands to lose if it goes ahead to award this proposed loan.

To be awarded the loan, BBG should either reduce its request or provide additional collaterals.

5.5 Interest charged

Billabong International should be notified that interests vary depending on the amount borrowed. The interest can also be fixed or on floating terms. For instance, using CBA guidelines the following can be noted of fictional loan request. Taking BBG's proposed repayment pattern as lacking the option of a down payment and the amount disbursed for funding as A$100 million, then BBG will be required to repay A$20 million plus 12% of 20 million in each instalment, five times to offset this disbursement.

5.6 Lending Commitment

In making commitment to borrow, the borrower (BBG) is required to complete lender's loan application form. For Australian case, the bank should be notified of the request not later than 2:00 p.m. (Australian time). This day will be taken as the 12th day to BBG's designated or proposed disbursement date (based on CBA guideline).

5.7 Disbursement

The bank (CBA) requests the borrower to stipulate the mode of payment on the application form. In addition, BBG should indicate whether it wants the whole amount disbursed in a single day or in instalments.

Though not mandatory, CBA request BBG to name its proposed account number and branch of disbursement in Australia. This will help CBA's management to adequately prepare to service their request.

Having met the stated conditions; CBA will herein set forth on the agreed disbursement date credit the approved amount in BBG's account.

Since BBG is a multinational corporation, need may arise for it to distribute the proposed disbursement amount to its sister companies. In such case, CBA, with the approval of BBG, will make use of the reputable clearing house (Interbank Payment System) to handle primarily any large Euro transfers to these sister companies. The choice of this system was adopted because of its strength in automatically re-routing large volumes of foreign funds (Gooch & Klein 1996, p.47).

5.8 Fees (Closing costs)

The following fees, which are associated with the application, processing and disbursement of any funding request, have been detailed by CBA.

Description of costs/fees

Proposed market value

CBA Packaging fee


Attorney fees


Commitment fee

0.5% of the total loan amount


18% of the total loan amount

A search of BBG's titles


Table 8 showing the involved fees

Billabong International is thereby informed that the above fees associated with its loan will be covered by it. Though these costs may slightly vary, BBG should note that in case of any variations, CBA will have to provide certifications to justify the adjustments for it to bear the whole amounts.

5.9 Warranties and Representations

To ensure that CBA is dealing with a reputable client who also possesses ‘good standings' in the eyes incorporating jurisdiction (The Australian jurisdiction), the following warranties need to met by BBG:

  • That BBG is a duly registered multinational surf wear owning the stated collaterals. A certificate of its incorporation will therefore be forwarded to the bank.
  • In addition, the authorization by the Australian authorities will ensure the validity of the process and its repayment enforceability. 
  • Furthermore, the absence of any event default or risk pertaining to the loan before its disbursement will constitute an additional warranty. To add, BBG's assurance of its commitment not to engage in any defaults will enforce this warranty.
  • Lack of proceedings, actions or claims on BBG's side will highlight its financial strength and viability and thus indicate on its credit worthiness.
  • Valid certificates of BBG's assets will also add up to the representation and warranty list.

5.10 Covenants

The lender will use the covenants with the main purpose of requiring the borrower (in this case BBG) to accomplish the necessary things associated with repaying the loan. By doing this, lender believes that the borrower will not compromise or default on the agreed conditions and as such will continue to service the loan as per the agreed terms and conditions. Secondly, the lender also believes that in meeting the covenants, BBG will not lure itself into financial trouble by approaching other creditors. As such, the firm will maintain its operating procedures thus maintaining its future flexibility.

From the above perspective, CBA proposes to adopt and implement the use of the following restrictive covenants to any borrower:

5.10.1 Use of the loan proceeds

CBA will make a follow-up to ensure that the borrower uses the proceeds for the two stated reasons; clearing the pending bilateral loans and as working capital for expanding its operations. Any other use other than the two will be considered as a violation of the loan agreement.

5.10.2 Government authorizations

CBA will require the borrower to make, obtain and store in the full force all authorizations pertaining to this agreement with the Australian government authorities. As such, these authorities will accent to the validity or monitor the repayment of the loan by the borrower.

5.10.3 Financial Statements

The borrower shall furnish CBA with all its financial statements on a regular basis. As previously stated, BBG's end of financial period has always been on the 30th of June and for such, CBA will provide the management with a 30 day working period upon which the financial statements should have been furnished to CBA for analysis and review. As such, CBA will be fully informed on the financial status of the borrower.

5.10.4 Inspection Rights

CBA will also require the borrower to enable its representatives from the financial department to examine their records and property times considered reasonable or appropriate to them. For instance, if the CBA Chief Financial Officer considers that the information presented in the financial statements is or appears to have been tempered with; he may request his team to perform an audit analysis at the firm's premises. The rights to do so are always determined by the borrower.

5.10.5 Default Notices

CBA will require any borrower to promptly give notices of any impending repayment default or any other events that may constitute adverse effects on their ability to undertake obligations to service the loan on a timely manner. This will help the two parties prepare on their next course of action which include amongst other CBA granting the surf wear firm a grace period.

5.10.6 Insurance

Having presented the company's insurance amongst its collaterals, CBA will require that the borrower regularly services this insurance with a reputable and financially sound insurance company. The risks covered in the insurance clause should be related to risks affecting similar surf wear companies in the world. This may include the burning down of company premises.

In doing this, CBA believes that it will be in a position to claim parts of its resources in case of the borrower becoming bankrupt.

5.10.7 Maintaining of positive ratios

CBA proposes that the borrower shall maintain a positive ratio of current assets to current liabilities. The recommended ratio by the company is that of less than 1.5:1.

In addition, the borrower, at all times, should maintain debt to equity ratio of not more than 1.5:1. This will ensure that it will always be in a position to comfortably service the impending loan.

5.10.8 Tax exemption notice

If any borrower will be awarded any tax exemption by the government on the amounts of repayment, then the company should forward certificates evidencing the same to CBA in time before the repayment of the affected instalment. This will keep the lender well informed on the total amounts to be repaid.

Closely related to the above, the borrower will pay all government charges attached to the repayments.

6.0 Events of default/risks and their mitigation

The following have been considered as events of default in these transactions;

6.1 International Bonds

Venturing into foreign bonds is quite risky. This is because the fund's prices can drastically reduce thus causing heavy losses to the parties involved especially in instances of negative fluctuation in the foreign currency in which they are trading. For example, the maturation of the bonds can correspond with the fluctuating in foreign currency prices thus meaning that the borrower (BBG) will have adverse effects on its payouts, dividends as well as its performance. As Kyle (2010) noted, the greatest risk associated with this kind of funding is that it deals with unforeseeable claims.

Though this risk has proved elusive in its mitigation, companies have carried out detailed market analysis to determine the strengths and weaknesses of foreign market economies. As such, they can only select strong economies to invest in.

6.2 Swaps

BBG should be notified that it stands to lose part of its bargain if its counterparty's approved proposal does not peg to an identical index. The swap bank may broker a deal that only suits the other party. However, to mitigate on this risk, it is required that the parties involving in the borrowing opportunity engage in detailed negotiations and if possible adjust their wishes to a level where both parties can feel satisfied.

On the part of the swapping bank, the following two risks stand to affect its involvement in the deal since they are valueless in the initial stages. Firstly, the interest rate may shift against the pre-determined rate say halfway into reclaiming the swapped funds. Secondly, denominational currencies have been unstable by appreciating or depreciating. For example if a currency swap involved an Australian bank swapping funds (on request of the borrower) to say US, the receiving bank in the USA would be well of while its partner would be worse off if the US dollar appreciated instantly.

6.3 Others

The following risks were also identified in CBA's guidelines as constituting risks or events of default

The failure by the borrower to service the annual repayment amounts. In such a case, the lender, having been un-notified of the action will take any necessary action to reclaim its amount. For instance, CBA may decide to initiate and engage legal proceedings against the company. The costs of such proceedings will also be taken care of by the accused.

Moreover, if the borrower fails to implement or adhere to the above stated covenants, then this will be considered as events of default. In such cases, legal proceedings will also be initiated on the borrower for having violated the loan agreement.

Ideally, if CBA in its efforts to determine the correctness or the truthfulness of the warranties or representations presented by the borrower for securing the loan finds that incidences of lying were engaged by the borrower, then this will also constitute a default event. As such, CBA will carry out its own evaluation to determine who the correct warranties and representations were. Such incidences will lead to automatic cancellation of the engagement.

Tellingly, the dissolution of the borrower or its involvement in bankruptcy cases will constitute events of default. As such, CBA will engage its team of legal experts to oversee the sale of the collaterals provided to reclaim its value of capital.

Furthermore, if any of the parties or stakeholders involved in this loan process, terminates their membership then CBA will consider this an event of default. For instance, if government authorities no longer observed or enforced the repayment of the loan, then CBA will consider this as a risk since it may ‘motivate' the borrower into dishonouring the repayments. In such cases, such parties will mutually be replaced since their services will no longer be considered worthy.

Beside, the disposing off of collaterals by BBG will also be considered events of default. To mitigate such risks, a court injunction will be imposed on the availed collaterals to prevent their premature sale.

Conclusively, it should be highlighted that the proposed loaning structure constitutes a best tool of CBA evaluating their potential loan clients. Other than securing its funds, it should also be noted that this structure will also be of great benefit to the various borrowers since it provides for conditions that limit their credit unworthiness thus enforcing their stability.