Liability Management at General Motors
HARVARD BUSINESS SCHOOL PUBLISHING
Posted: 18 Sep 1996
Date Written: Revised, June 6, 1995
SUBJECT AREAS: Liability management; financial engineering; derivatives; capital structure; corporate treasury.
CASE SETTING: 1992; global automobile maker, corporate treasury activities, automobile manufacturing.
In this case, an analyst at General Motors charged with managing the structure of the automaker's debt must decide whether and how to modify the interest rate exposure of the firm's most recent debt offering. The analyst must take into consideration GM's liability management policy guidelines, the firm's existing interest rate exposure, his expectations of interest rates, and the wide range of interest rate products available. He must decide whether to leave the fixed-rate instrument unchanged, or to enter into a swap, cap, interest rate option, or swap option transaction.
This case is used in the Corporate Financial Engineering elective in Harvard's MBA program, as well as in advanced corporate finance and risk management courses in other MBA programs. It has also been used extensively in executive education programs at HBS and elsewhere. The case can be used to discuss a variety of issues. First, by analyzing the specific decision at-hand, students are introduced to a wide variety of interest rate management instruments, and can see how each of them will affect the incremental exposure brought about by the new borrowing by GM. Yet, this decision must be made in the context of the firm's overall liability management strategy and its existing portfolio, thereby encouraging students to analyze the logic of the firm's existing policies as well as their implementation. In particular, students are exposed to the tension between risk management and "active management" of the firm's exposures (i.e., attempting to speculate on the treasury staff's anticipation of movements in rates.)
JEL Classification: G32, L62
Suggested Citation: Suggested Citation