The Costco Lenders
At the end of fiscal year 2009, Issaquah (Washington state)-based Costco Wholesale Corp. operated 567 membership warehouse-type retail stores all across North America, Mexico, the UK, and northeast Asia, besides having a solitary foothold in Australia. It stands to reason, therefore, that requirements for trade credit tend to be dispersed rather than centralized. That fiscal year, the company had sixteen letter of credit, revolving credit and commercial paper facilities with as many financial intermediaries in seven countries (Costco Wholesale, 2009, pp. 70-71). Within the limits of this short paper, we cover the Royal Bank of Canada and an undisclosed Japanese investor as two examples of lenders.
The Stock Issuer and Transfer Agent Financial Intermediary
Mellon Investor Services is the investment bank affiliate that issues Costco stock. Mellon Bank (2004), through subsidiary Mellon Investor Services (MIS), issues, sells and otherwise administers shares of Costco for investors wishing to acquire as little as $250 worth of shares and as much as $250,000.
The Role of Costco Financial Intermediaries
The Royal Bank of Canada (2003) agreed to provide the 77-outlet Costco Canada a C$60 million credit facility that could be drawn as advances by Canadian stores, U.S. stores, guarantee letters, letters of credit and bankers; acceptances. Interest accrued from day to day while advances were outstanding; Costco (2009) reported cost of Canadian credit lines at 1.76 percent per annum, towards the lower end of the 0.64%-3.05% range for facilities arranged elsewhere in North America, Japan and in the UK. Royal Bank of Canada agreed to deposit advances directly to Costco at the designated branch of account on notice of formal intention to take an advance.
Lead time depended on whether the advance requested was at least $100,000 (and multiples thereof) or $10 million (and multiples). Defaults incurred a penalty of Prime Rate plus 2%. Further, the facility protected the bank from exchange rate fluctuations vis-Ă -vis the U.S. dollar with a provision that Costco would pay on demand any amount exceeding the principal if the excessive drawdown was caused by currency movements.
The Japanese example was a case of the wholly-owned subsidiary in the country issuing several promissory notes via a private placement in October of 2007. A private placement usually means that the lender was an individual, family or fund that did not wish to be identified. The total placement amounted to $69 million, with an eight-year term (and therefore maturing in 2017). Costco Japan bore costs of 2.695% per annum in order to retire “…2.07% Promissory Notes in October 2007 and for general corporate purposes…” (Costco, 2009, p. 40). Given that the new promissory notes cost more, the company evidently needed working capital more than it needed to retire the 2.07% Promissory Notes.
At Mellon, a concessionary purchase scheme permits depositors of the bank to reach the minimum dollar value by committing to have ten monthly payments automatically debited from their accounts each month. MIS also accommodates those who already own some stock by accepting orders for new holdings in one-tenth increments of the intended value, again via automatic deduction or by sending in a check or money order.
Other small shareholder services include reinvesting dividends, recordkeeping and facilitating the transfer of some or all shares to another person who opens an account with the administrator. Where Costco is concerned, MIS is an intermediary that effectively broadens the stockholder base with “retail” transactions of as little as 50,000 shares (assuming the par value of $0.005).
References
Costco Wholesale. (2009). Annual report 2009: Year ended 2009. Issaquah, WA: Costco Wholesale Corp.
Mellon Bank N.A. (2004). The investor services program for shareholders of Costco Wholesale Corporation. Web.
Royal Bank of Canada. (2003). Revolving credit agreement between Costco Wholesale Canada Ltd. and Royal Bank of Canada. Montreal: Royal Bank of Canada. Web.