Topic: Foreign currency borrowing/deposits

Zakaria Construction Plc. (ZCP) are your customers specialised in the construction of highways. Sometime in February, your customer approached you to discuss their intention to apply for a Bid Bond to participate in an International Competitive Tender by the Ministry of Roads and Highways. The Tender is for the award of a contract to construct the Eastern Corridor Road. After discussions with your bank, the Bid Bond was issued in favour of Ministry of Roads and Highways. On March 1, Mr. Adamu, the Chief Finance Officer of ZCP, called to inform you that the company has successfully won the Tender and had been awarded a contract to construct a portion of the main project. At the meeting, Mr. Adamu showed other documents confirming the award of the contract – which also showed the contract value as USD1.2million. The meeting discussed at length, how the bank could assist ZCP to obtain an Advance Payment Bond in favour of Ministry of Roads and Highways to enable the company access 11.25% initial Mobilization Funding of the contract value.

The following events took place: a. On April 1, the Advance Payment Guarantee was issued and submitted to the Ministry of Roads and Highways. b. The 11.25% Advance Payment Funding is confirmed by Ministry of Roads and Highways and will be received by your bank exactly in three months’ time, on July 1, for customer’s account. c. Also on April 1, the company entered into three months’ Forward Contract to sell the US Dollar proceeds of the 11.25% Advance Payment to your bank on arrival of funds.

ZCP has to acquire materials before main construction works begin in July and so, have requested your bank for immediate funding and have proposed two options as follows: i) To borrow the US Dollar amount of the 11.25% Advance Payment for three months and repay when it is received on July 1 . ii) To borrow Ghana Cedi equivalent of the US Dollar amount for three months and repay from proceeds of the three months Forward Contract.

Rates available for the day are as follows:

You are also given the following additional information: a. Term SOFR (Secured Overnight Financing Rate) which has replaced the LIBOR, is quoted this morning for 3 months US Dollar at 5.1% with your bank’s margin at 4.5%. b. Commitment and Arrangement Fees are charged separately on Dollar borrowing at 1.50% and 0.50% respectively. c. Interest and other charges on US Dollar borrowing should be translated at middle-rate. d. For ZCP, your bank will lend local currency at 2% above its Base Rate of 21.75% p.a. e. Processing Fees for Cedi Facility is 1.0%. f. Cedi Facility also attracts Group Insurance Commission of 1.50%.

REQUIRED Calculate each of the two options and choose the most favorable one from your customer’s point of view, stating your reason.

[Total Marks 20]