CASE

You are the CFO of a Mexican transnational group listed on the Stock Exchange, which is why it has very strict policies of Corporate Governance and its Audit Committee is composed of people with much experience in theory and practice, as well as general business knowledge, as it is involved in activities of Energy, Logistics, Financial Sector, Manufacturing and Retail mainly, is subject to much questioning by the regulators.

During the pandemic and its consequence of the economic crisis, as a group it has been successful and wants to continue growing, reason why it wants to finance itself since you analyzed and have solid bases to prefer third party financing than to use the cash flow generated by its operation, for that reason you recommended to make an issue of Convertible Bonds, with forced conversion within 10 years, at a rate of 3 bonds for each share, the project must first be presented to the Audit Committee and the Finance Committee, before taking it to the Board of Directors for approval.

When he presented it to the Finance Committee, he was told the following

A retired banker told him that it is easier to take out a bank loan, given his prestige and his lines of credit, since the interest rate on the issue is only marginally lower than the bank rate, but the issue involves more corporate and regulatory paperwork. A finance professor pointed out that the effect on financial leverage is the same, so to get you into such a mess When making the presentation to the Audit Committee, they pointed out the following

The Commissary, who is their External Auditor, says that they must register it as a liability but an accounting professor who belongs to that committee says that it is accounting capital, generating a discussion The external lawyer points out that it is a financing the issue so it must be registered as a liability.

His Director of Taxes tells him that he has all the arguments to justify that the benefit is greater with the emission than with the loan and that it accompanies him to the presentation in the two committees, but in the past this Director had strong criticisms in the Audit Committee for affirming that there are interests that are financial but not fiscal, they told him that it is not possible, it is pending that the CEO receives it so that he justifies his affirmation in spite of the conflict that was generated in this last committee.

When he was preparing for the committee meetings, he received a call from an Investment Banker who proposed to acquire another group of companies that are complementary to him for the development of his group. In addition, he offered to obtain financing through perpetual obligations; the COO, who seeks to take advantage of the current situation, is also interested in accepting this new proposal and says that he supports it at the meeting of the Board of Directors.

What will the CFO do to justify his initiatives despite the committee's views?