Euroloans v Local Currency Loans
Some brokers are advocating a Euroloan denominated in Euros in part due to the Greek Financial Crisis (GFC-2). There are a number of reasons for this:
- Due to the depressed Europeanmarket at present interest rates are lower than in Australia (Petty et al, 2009, p.597). The Euro Loan rate is 1.75% (European Central Bank, 2010) whereas the Australian Cash Rate is higher at 4.75% (RBA, 2010)
- The Australian dollarcontinues to appreciate against major foreign currencies in part due to our commodity prices. Today AUD 1 buys EUR 0.67147 (XE.com, 2010). This is up from a low of EUR 0.56 earlier in 2010 (Exchange-Rates.org, 2010).
- There is generally more access to funds in overseas marketsthan in Australia (Petty et al, 2009, p.597)
- Allows the firm to diversify their debt portfolio outside of the Australian market
However there are some risks and benefits in considering Euroloans. They are:
- Cheaper interest rates than in Australia
- Access to higher levels of debt eg in excess of $100m
- Australian Dollar has been appreciating in recent times meaning that the amount to be repaid could be less than the current interest rate
- If the local currency depreciates then repayments can be higher than the interest rate
- If the foreign current appreciates then the repayments will be higher than the interest rate
The benefit of a Euroloan, especially with a depreciating currency due to GFC-2, means that companies can get a lower interest rate as well as a possibly lower rate again if the Australian dollar appreciates or the Euro depreciates.
On the flip side if the Euro can sort out the GFC-2 issues and the currency again appreciates or the AUD$ depreciates during the term then the company will pay more for the loan. This is the risk with the Euroloan concept.
More by this Author
During my MBA I had the opportunity to review a case study on the watersports brand Body Glove. Body Glove was founded by Bob and Bill Meistrell taught themselves to swim in rural USA before moving to Manhattan Beach...
Harry J Friedman book, 'No thanks, I'm just looking' In my current position I manage 22 Retail Shops, an 80 seat Contact Centre, a direct B2C sales force and a web sales team. My teams sell insurance, security, travel,...
In this hub Michael Kromwyk provides some insight into the ACER competitive strategy and how it is positioned against other brands in the PC and peripherals market. Included in the paper are some university level models...
No comments yet.