Geeli has historically used only short-term domestic bank financing and hence the management is inexperienced in managing long term debt servicing. However, it is necessary to consider the various debt markets where Geeli can issue long term debt. The team evaluated the various debt markets based on the same base criterion as the equity markets (See Exhibit A). Firstly, Geeli can borrow from Chinese state owned commercial banks. However, most loans went to state owned companies. Due to high level of non-performing loans, government implemented policies that have discouraged inexperienced credit officers from lending to private firms. Thus, borrowing large amounts from domestic banks was politically risky and costly due to high premiums that credit officers may charge due the policy of ‘individual responsibility’. As an alternative, Geeli can raise money in the Chinese corporate bond market. However, the corporate bond sector in China has had a history of defaults that resulted in stringent listing requirements. All recent issuances have only been from ‘AAA’ rated state companies. Also, unfriendly bankruptcy procedures drove away potential creditors. These factors made domestic corporate issuance impossible. The next option was to borrow from foreign banks present in China.
But they had limited presence in China. The foreign exchange controls very yet to be relaxed in 2005 which limited foreign banks access to clients in China. So Geeli has to wait for the WTO reforms to be implemented that would have fully opened Chinese markets to foreign banks. Additionally, RMB denominated loans in China had limited attraction to the foreign clients due to the 30% average recovery rate which is much lower than the 85% rate observed in US. This will mean foreign creditors will expect a significant premium for Geeli’s debt. Qualitative Analysis of Private Equity Placement in Various Markets: The main advantage of the private equity market was that, since the investors are sophisticated, the disclosure requirements are much less and the process was much quicker. However, the size of the private equity market was only $600million in China.
Also, lack of easy exit for investors due to rudimentary market infrastructure meant it impossible for Geeli to raise the required funds in Chinese private equity market. Although Geeli’s investment banker has successfully placed Chinese companies with foregin investors, their size could not have comparable as the average dollar denominated Private equity fund in China was only $88M and the whole of the market only raised $2.4B in 2005(see Exhibit B). So raising $400M for a single deal is difficult. Additionally, there is a big probability of government intervention for dollar denominated deals. In 2005, a similar deal involving Caryle group was overruled by the government. Also, getting government approval is said to take many months or years.