Freeport-Mcmoran

In: Business and Management

Submitted By ZhanboWang
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1. JPMorgan and Merrill Lynch were selected to underwrite and book-run all of the financings because together they committed $6 billion in bridge loans and to underwrite the entire $17.5 billion in debt financing, plus $1.5 billion in credit lines. This created significant risk by aligning the interests of FCX and the two firms in terms of placing the debt and credit with other banks and institutional investors. Because this commitment was critical in facilitating the M&A transaction, FCX gave all of the book-running and M&A business to these two firms. JPMorgan and Merrill Lynch had guided FCX through the M&A pre-deal conception and the activity targeting Phelps Dodge. In addition, both firms held high positions in league tables for financings and M&A and had existing long-term relationships with FCX’s management. But the key to their fee bonanza was the risky commitment to provide bridge loans if placement was not possible in the capital markets.

2. The leveraged finance group was responsible for making the bridge financing commitment on behalf of JPMorgan that allowed FCX to make a firm bid for Phelps Dodge. To ensure that the M&A transaction could be completed, it was essential to line up the acquisition financing. This leveraged financing was particularly important because FCX was taking on so much new debt and was acquiring a company larger than itself. The leveraged finance group had to analyze the new capital structure, the impact on credit ratings, and the ability to “resell” the debt to other investors and banks. The group also had to lead the effort to secure internal firm commitments and gain acceptance for associated capital charges. The group’s understanding of the market was crucial to the success of the acquisition.

3. The financing risk associated with an investment bank’s underwriting commitment in relation to…...

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