Financing Strategies for CTC

This assignment analyzes CTC, a telecommunication company facing financial difficulties after privatization. It examines the impact of privatization, the company's external funding needs, and the feasibility of raising capital through American Depository Receipts (ADRs). The report ultimately proposes alternative financing strategies for CTC.

Global financing choices : American
Depositary Receipts (ADR)

Table of Contents
INTRODUCTION...........................................................................................................................1
1. Impact of privatization............................................................................................................1
2. External funding needs of CTC...............................................................................................1
3. American Depository Receipt.................................................................................................1
4. Meeting financial needs by ADR............................................................................................2
5. Financing strategy...................................................................................................................2
CONCLUSION................................................................................................................................2
REFERENCES................................................................................................................................3

INTRODUCTION
American depository receipts (ADR) is determined as a negotiable instrument which is
issued by U.S. Banks which represent the shares of foreign company traded on US stock
exchange. ADRs are denominated in US dollars and the underlying security is held by an
overseas US bank or financial institution (Carrieri, Chaieb and Errunza, 2013). The present
report provides an understanding of raising capital through ADR by CTC which was in financial
difficulty and privatised under a bond company which also faced substantial difficulties in
expansion and modernization of CTC.
1. Impact of privatization
Privatization is referred to as the process of transfer of ownership of business operations
or specified property of a government organization to a private sector. It is the transition of
ownership, business and property from the public sector to a privately owned entity. In the given
case, CTC is a telecommunication company which was facing severe financial difficulties, so the
government decided to privatise the company through a bid which was won by the Bond
Company. But, the privatization of CTC was not helpful as financial stress did not reduce and
Bond Company had to sell its stake in CTC to Telefonica (Yao, 2012). Chile selected Bond's
group bid because the bid of the organization was approx 35% i.e. $114.8 million for 151 million
shares was more attractive than others and had more creative financing bid structures.
2. External funding needs of CTC
Lowering dividend was not enough to solve all the financial problems of the company,
therefore it was required to raise funds but due to following reasons, external funding was
required:
 Stock market of Chile was thinly capitalised and only 1% of the total market
capitalization of the market can be raised by it.
 Chilean banks were also constrained in providing necessary capital to CTC and were able
to provide only 5% of their total capital and reserves (Srikanth and Kishore, 2012).
3. American Depository Receipt
ADR is determined as a negotiable instrument which is issued by U.S. Banks that
represent the shares of the foreign company traded on US stock exchange.
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US investors wish to own an ADR because they are not required to transact in the foreign
currency as they are traded in US dollars and clear through US settlement systems (Lee, Chang
and Chen, 2015).
CTC might want to issue ADR as it needed to raise capital which was not provided by
Chilean banks and stock market.
4. Meeting financial needs by ADR
Rising of funds by issuing ADR did not prove beneficial for CTC as it involved
numerous problems. The major problem was that substantial amount of stock would flow back to
home currency and another reason was the political instability. CTC ADR would not be
attractive for the US investors.
5. Financing strategy
As Senor Gracia, the financial strategy can be proposed – corporate restructuring i.e.
reorganising ownership, operations and financial structures of the company (Singh and Tandon,
2012).
CONCLUSION
In a nutshell, it can be articulated that ADRs are negotiable instruments issued by
financial institution of US which represent share of foreign stock traded on US stock exchange.
The company has to consider both pros and cons before issuing ADR as a source of raising the
capital.
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REFERENCES
Books and Journals
Carrieri, F., Chaieb, I. and Errunza, V., 2013. Do implicit barriers matter for
globalization?. Review of Financial Studies. 26(7). pp.1694-1739.
Lee, C. C., Chang, C. H. and Chen, M. P., 2015. Industry co-movements of American depository
receipts: Evidences from the copula approaches. Economic Modelling. 46. pp.301-314.
Singh, A. and Tandon, P., 2012. A study of financial performance: A comparative analysis of
SBI and ICICI Bank. International Journal of Marketing, Financial Services &
Management Research. 1(11). pp.56-71.
Srikanth, M. and Kishore, B., 2012. Net FII Flows into India: A Cause and Effect Study. ASCI
Journal of management. 41(2). pp.107-120.
Yao, Y., 2012. Momentum, contrarian, and the January seasonality. Journal of Banking &
Finance. 36(10). pp.2757-2769.
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