Hutchison Whampoa LTD HWL was established in 1977 as a result of merger between Hong Kong and Whampoa Dock

k Company Limited (HWD) and Hutchison International Limited.When HWL ran into trouble near 1978, The Hong Kong and Shanghai Banking Corporation came to rescue and took a 22% stake in the company. In 1979, bank sold his stake in Hutchison to Cheung Kong for HK$639 million. A Fortune 500 company and one of the largest companies listed on the Hong Kong Stock Exchange. HWL is a leading corporation committed to innovation and technology with business spanning the globe . HWL reports turnover of approx HKD 326 billion (USD 42 billion) at year end 2010 . HWL reports turnover for 6 months till June 2011 is HKD 187 billion (USD 24 billion).HWL currently operates in 54 countries and employs around 230,000 staff worldwide.

HWL has 5 core Business : 1. Ports & Related Services 2. Property Development & Holding 3. Retail 4. Energy & Infrastructure . 5. Telecommunication . Ports & Related Services :-Hutchison Port Holdings (HPH) operates across Europe, the Americas, Asia, the Middle East and Africa. It operates in five of the seven busiest container ports in the world, handling 13% of the worlds container traffic. Hutchison group owned HIT which was worlds largest privately owned & operated container terminal in throughput .Hutchison group owned and operated at Felixstowe in UK. Felixstowe is the largest port in UK and 4th largest in Europe . HIT operated ports in Shanghai , Yantian , Gaolan , Shantou and Xiamen . Hutchison was awarded rights to operate 2 operates in Panama . Property Development & Holding :-HWL has developed residential and commercial properties for sale and lease. Its portfolio included some of Hong Kongs largest private housing projects such Aberdeen centre, provident centre ,Whampoa garden ,Laguna city etc. Together with Cheung Kong Holdings, HWL has set up a joint-venture company, Harbor Plaza Hotel Management(International) Limited to operate and manage hotels under the portfolio of the Hutchison Property division. The group also had an interest in Sheraton Hong Kong Hotel . Retail :-A S Watson, Hutchisons retail subsidiary, operated 3 of Asias retails chains i.e. Park N Shop Supermarkets, Watsons personal Care Stores and Fortress. It was one of the best known trading names in Asia with 500 retail outlets in countries like China, Hong Kong, Macau, Taiwan, Singapore, Malaysia, Thailand , Indonesia and South Korea .The distribution

operations made the group one of the leading food and beverages retailers in Hong Kong .Park N Shop operated 225 stores in North & South China, Hong Kong and had about 33 % share of Hong Kong market .Watsons Personal Care Stores had 380 outlets offered a range of 25000 products from more than 20 countries including cosmetics , fashion items , medicines etc. Fortress was a leading retailer of electronic and electrical appliances with a 25 % market share. Telecommunication ;-HTIL has total of 3.7 million subscriber base including in that of Hong Kong, Macau, Australia, Thailand , Malaysia, Indonesia, Sri lanka ,India etc. The company provides wide spectrum of services including : personal communication network , cellular telephone network and service provision , paging, trunked mobile radio , fixed line services , satellite systems and services and radio broadcasting. Hutchison was one of the largest mobile telephone operators in Hong Kong with over 550000 subscribers Hutchison had a 49% stake in Orange plc in UK which operated the orange network . Energy and Infrastructure :-Cheung Kong Infrastructure (CKI), HWLs infrastructure arm, is a diversified infrastructure company with businesses in transportation, energy, infrastructure materials, water plants and related operations. HWL has an interest in Hong Kong Electric Holdings (HEH), the sole electricity supplier to Hong Kong Island and also has an interest in 9 power plant projects in mainland China . Hutchison is also a major shareholder of Husky Oils one of Canadas largest privately owned integrated oil and gas companies.

Capital Structure
Capital structure is a business finance term that describes the proportion of a company's capital, or operating money, that is obtained through debt and equity. Mainly the capital structure consists of Equity Debt Hybrid (Mixture of Debt + Equity)

Capital Structure may include long-term debt, common stocks, preferred stock and retained earnings and thus acts as the permanent long-term financing of the company. However, the capital structure varies from financial structure which includes short-term debt and accounts payable. The key division in capital structure is between debt and equity.

Equity Capital: Equity Capital refers to money put up and owned by the shareholders. Broadly equity capital consists of two types: Contributed capital which is the money that was originally invested in the business in exchange for shares of stock or ownership. Retained earnings which represent profits from past years that have been kept by the company and are used to strengthen the balance sheet or fund acquisitions or expansion.

The various forms of equity that can be used to for capital are: 1. Common stock is the most widely used form of equity 2. Preferred Stock is an equity instrument that the holders participate as a business owner like the same as the Common Stock. The difference is that the preferred shareholders are entitled to have repayment of capital before the common shareholders. 3. Convertible Debenture is similar to a common bonds, the difference is that a convertible debenture can convert into common stock during the specified rates and prices in the prospectus. Convertible debenture has been very popular during the good economic because the buyers expect that the profitable returns from converted stock will be much than the interest returns from common bonds. Some consider the cost of equity capital to be a very expensive type of capital a company can use. This is because the cost of equity is the return the firm must earn to attract investment. For example: A speculative mining company that is looking for silver in a remote region of Africa may require a much higher return on equity to get investors to purchase the stock than a firm such as Procter & Gamble, which sells everything from toothpaste and shampoo to detergent and beauty products. Debt Capital: The debt capital in a company's capital structure refers to borrowed money that is at work in the business. The safest type is generally considered long-term bonds because the company has years, if not decades, to come up with the principal, while paying interest only in the meantime. Another type of debt capital can be commercial papers which can be issued by large MNC corporations. For example: Companies like General Electric and Walmart may issue commercial papers which it may use to fulfil its operational needs. The cost of debt capital in the capital structure depends on the health of the company's balance sheet - a triple AAA rated firm is going to be able to borrow at extremely low rates versus a speculative company with tons of debt, which may have to pay 15% or more in exchange for debt capital.

Features of a Capital Structure

The capital structure of a company is decided on the basis of the view of an ordinary stakeholder. While developing an appropriate capital structure a financial manager must go for a long term profitability of the firm. In practice, for most companies within an industry, there would be a range of appropriate capital structures within which there are not many differences in the market values of shares. A sound appropriate capital structure should have the following features: Profitability: The capital structure of the company should be most advantageous, within the constraints. Maximum use of leverage at a minimum cost should be made. Solvency: The use of excessive debt threatens the solvency of the company. Debt should be used judiciously. Flexibility: The capital structure should be flexible to meet the changing conditions. It should be possible for a company to adapt its capital structure with minimum cost and delay if warranted by a changed situation. It should also be possible for the company to provide funds whenever needed to finance its profitable activities.

Equity Financing
Advantages: 1. The funding is committed to the firms projects & business only. The investors realize their profits only after the company earns the profits. 2. The company does not need to keep up with regular servicing of the debts. 3. Outside investors expect the business to deliver values and may also contribute with new ideas to drive the business. 4. Venture capitalist and private equity investors may also bring in experience and help in decision making for the company and key strategy formulation. 5. Investors may also provide follow-up funding if the business is doing well. Disadvantages: 1. Raising equity is costly, time consuming and may also take away the management focus away from the core business. 2. The company now will have more number of decision makers. Hence losing power of making decisions. 3. There can be legal and regulatory issues to comply with when raising finance, example: when promoting investments.

Debt Financing

Advantages: 1. Debt financing does not dilute the stake of the owner. 2. A lender is entitled only to repayment of the agreed-upon principal of the loan plus interest, and has no direct claim on future profits of the business. If the company is successful, the owners reap a larger portion of the rewards than they would if they had sold stock in the company to investors in order to finance the growth. 3. Forecasting of the loan repayment is much easier. 4. Interest on the debt can be deducted on the company's tax return, lowering the actual cost of the loan to the company. 5. No regular information to the stakeholders is required. Disadvantages: 1. Interest is a fixed cost which raises the company's break-even point. High interest costs during difficult financial periods can increase the risk of insolvency. 2. The larger a company's debt-equity ratio, the more risky the company is considered by lenders and investors. 3. Assets are needed to be pledged by the company. 4. Loss in future flexibility. What do firms look out for? There is usually a hierarchy that the firms follow when they frame their capital structure. The firms initially always go for the retained earnings. This is because it has the lowest cost of capital associated with it. Second in the hierarchy comes the debt financing option where companies prefer debt financing and the last in the hierarchy is the equity financing. That is, the equity financing option is the least preferred option. Rationale for Financing Hierarchy Managers value flexibility. External financing reduces this flexibility. Hence managers always look for internal financing options. Managers also value control as this helps in decision taking in an organization. An equity structure based more on equity would lead to dilution of their stake. Shown below is the Preference Rankings for long term financing (Survey by Stern School of business)

STANDARD AND POOR

Standard and Poor, also known as SnP, is the leading provider of financial market intelligence in the world. The company has been into existence for more than 150 years and has been providing very important information related to Independent Credit Ratings Indices Risk evaluation Investment research and data.

SnP has critically been an essential part of the worlds financial infrastructure, where it has been providing information such as credit ratings for different companies, industries, sectors as well as countries. These credit ratings help to determine the credit worthiness of the respective entity, and determine whether it is safe and eligible for short term as well as long term debt financial needs. After carrying out the detailed evaluation of the company it gives them credit ratings (bond ratings) for long term investments as follows:

No 1 2 3 4 5 6 7 8

Rating AAA AA A BBB BB B CCC,CC,C R

Description The obligator has extremely strong to meet the financial obligations and is less likely to be affected by environmental changes. The company has high capacity to meet financial obligations, and differ only slightly from the above. Though these obligators are safe, they can be affected by changes in circumstances more than the above mentioned. The have adequate capacity to meet financial obligations, but adverse economic conditions is more likely to lead to a weakened position. It faces major ongoing uncertainties, which could lead to inability to meet financial needs. An obligator with B rating is more vulnerable than above one to meet its obligations. These obligators are highly vulnerable, and probably on the verge of bankruptcy. The obligator is under regulatory supervision due to its financial health.

CREDIT RATING FOR HUTCHISON WHAMPOA LIMITED

Hutchison Whampoa was in need of long term financing instrument which would help in sustaining its growth for a long term. For this purpose, it was considering a number of options, one of them being issue of bonds. For the issue of bonds, it needed to acquire credit bond rating from a financial institute such as Standard and Poor, which would prove its credit worthiness to raise funds for long term, as well as to show its credibility in the market as an obligator. According to the financial ratios provided for the company, we find that the credit rating the company would get is:

THREE YEARS MEDIANS

AAA

AA

BBB

BB

HUTCHISON WHAMPOA

EBIT Interest Coverage EBITDA interest coverage Funds from operations/ total debt Free operational cash flow/ total debt Pretax return on capital Operating income/ sales Long term debt/ capital Total debt/ capitalization

16.1 20.3 116.4 76.8 31.5 24 13.4 23.6

11.1 14.9 72.3 30.5 23.6 19.2 21.9 29.7

6.3 8.5 47.5 18.8 19.5 16.1 32.7 38.7

4.1 6 34.7 8.4 15.1 15.4 43.4 46.8

2.3 3.6 18.4 2.4 11.9 15.1 53.9 55.8

1.2 2.3 10.9 1.2 9.1 12.6 65.9 68.9

6.15 4.1 32.8 9.35 12 16.35 29.2 40.8

BBB BB BB BBB BB A A BBB

Thus according to our study, the bond rating Hutchison Whampoa would be able to acquire is between BBB and BB. The rating which this company will be able to acquire is not very lucrative, since there is a high chance for the company to fall to BB rating if it does not improve its performance. As soon as it falls to BB, it becomes a non-investable grade bonds, and the market would become highly reluctant in buying bonds for the company.

Also, Hutchison would acquire a rating which is lower than its major counterpart industries from Hong Kong, which are Swire Pacific Limited and Wharf Holdings Limited, both having rating of A from Standard and Poor. The key financial ratios it needs to work upon in order to improve its credit ratings are: Funds from Operations/ total debt Long term debt/ capital Total debt/ capitalization These critical ratios signify that the apparent reason for low rating is already the high long term debts the company possesses which are about H$26 billon, which is very high with respect to other companies. On the other hand, the shareholders funds are proportionately lower. If it further raises debt from the market, these ratios would be significantly affected, reducing its credit rating even further. Thus the company needs to be careful with the choice it makes with respect to raising equity or debt from the market.