Mini Case 3 : Tenaga Nasional Berhads (TNB) Foreign

Currency Debt

1. What proportion of TNBs total debt is truly exposed to exchange rate risk?
TNB use portfolio management strategies payable as follows:
50 % use in fixed rate debt and 25 % use in the determination of floating rate

interest
Using cross currency and interest rate swap. All aimed to obtain a weighted average

value is the smallest of the total cost of debt that the company needs.
At the end of 2004, the park has a total debt amounting to RM 2.5 billion-almost
half of them in foreign currency. The average total cost of debt decreased from 7%
in 1997 to 4.97% in 2003. In the year 2004 due to the increase in interest rates of

foreign currency, the average cost of debt increased to 5.31%

Key from TNB debt strategy is by borrowing foreign currencies that have a lower
rate. Upon maintaining the debt composition 50-50, BNP managed to reduce the

average total cost of debt.

This approach means focusing debt at US $ that the average interest rate of 6% per
year and the Japanese Yen that the average interest rate was 2%. Debt strategy
with a variety of foreign currencies against the TNB has no side effects, which is
changes in foreign currency exchange rate changes affect earnings. Values to
changes in foreign currency and the proceeds from the transaction and translation
exposure related to long-term debt can affect the magnitude of changes in income

from TNB.
Based on the income statement TNB 2003-2004 period can be seen as a result of the
profit or loss of transactions and foreign currency translation. In 2004 both

translation and transaction losses of more than RM 200 million. Losses suffered by
TNB which reached a value of RM 500 million has reduced net profit of sales from
7.8% to 4.6%.
2. What do you believe should be of higher priority, the weighted average cost of the total debt
portfolio or the reduction in exchange rate risks associated with foreign currency
denominated debt?
Higher priority is the reduction of the risk of changes in value of the currency as a
result of foreign currency debt in the money compared to the weighted average debt of
the total debt portfolio. Changes in foreign exchange rates occurring greater influence
on income earned TNB. Whereas changes in interest rates affect the weighted average of
the respective foreign currency debt did not significantly affect earnings TNB because of
changes in interest rates do not change the value of the currency. Of data on Exhibit A
look that changes in interest rates affect only the weighted average debt in 2004
amounted to 0.39% while the result of changes in foreign currency exchange rate in
2004 was 3.2% of sales.

3. What would be the short run and long run impacts on TNBs debt portfolio of a revaluation of
the ringgit?
Short-term effects resulting from the revaluation of the value of Ringgit against TNB
debt portfolio is that the value of debt in foreign currency at the park will increase the
debt portfolio. The long-term impact is that TNB debt exposure in foreign currency will
increase, so will the higher thereby increasing the risk of TNB debt because of the large
proportion of foreign currency debt will mean more risk to changes in foreign currency
exchange rate.
4. What do you think TNB should do?

TNB should be done is reduce the proportion of debt in foreign currency so that the risk
of changes in foreign currency exchange rate will decrease.