The Cydefex Brazilian operation, Cydefex Brasil Ltda, is a separate subsidiary owned 90% by Cydefex and 10% by a local investment company. The company has purchased specialized manufacturing equipment from a US company that has offered favorable long-term vendor financing; however, the equipment vendor is concerned with country risk. Without a guarantee from the Cydefex US, how could the Cydefex Brasil Ltda. take advantage of the vendor financing (without moving out of Brazil)?
Cydefax Brasil Ltda. can take advantage of the vendor financing without moving out of Brazil by incorporating a country risk premium in the long-term vendor financing deal with the vendor. The vendor is concerned about the country risk in Brazil and it is only by incorporating a country risk premium in the financing arrangement that the Brazilian subsidiary will be able to mitigate the country risk for the vendor and hence will be able to obtain vendor financing from that vendor.
It should be noted that Cydefax Brasil can structure the vendor financing either with debt instruments or with equity instruments. In both cases the cost of financing will have to be adjusted for the country risk and this will enable and allow the Brazilian subsidiary to take advantage of the vendor financing without moving out of Brazil.
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