International Financing Markets

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Presentation transcript:

International Financing Markets I. International Equity Sources - Global Equity Markets - Methods of Sourcing - Crosslisting in Secondary Markets - New Equity Issues II. International Debt Sources - Debt Management and Funding Goals - International Debt Instruments - International Bank Loans - Euronotes - International Bond Market Lecture 11

International Financing Sources Classification of Global Financial Markets Characteristics of External Markets include: International syndicate underwriters Securities offered simultaneously in a number of countries Issued outside jurisdiction of any one country Internal Market (National Market) External Market International Market Offshore Market Euro-market Domestic Market Foreign Market Euro-Equity Market Euro-Bond Market Debt Market Euro-Note Market Equity Market Lecture 11

I. International Equity Sources 1. Global Equity Markets - Trends in International Equity Markets - Increase in size - Increased integration - Emerging markets of transition and developing economies - Differences among stock exchanges - use of specialists - trading mechanism: computerized vs trading floor - transaction costs (e.g. negotiable commissions vs fixed commissions) - listing requirements (e.g. more disclosure and strict accounting rules in U.S.) - Global Market Integration - close linkage of markets due to advances in telecommunication - increase in correlation of prices in different markets - firms achieve international pricing of securities Lecture 11

I. International Equity Sources cont’d 2. Methods of Sourcing Equity A. Crosslisting of shares on Foreign Stock Exchanges - in U.S., foreign shares are traded through ADRs American Depository Receipts (ADR): Negotiable certificates issued by a U.S bank to represent underlying shares of stock held in trust at a custodian bank sold, transferred and registered like other stocks can be exchanged for the underlying stock sponsored vs unsponsored ADR Global Depository Receipts (GDR) Note: Firms do not raise capital in secondary markets. Why do then firms crosslist? Lecture 11

I. International Equity Sources cont’d Motives for Cross listing Improve liquidity of existing shares (benefits existing shareholders & increases the investor base) To increase share price (through overcoming mis-pricing in segmented local market Evidence: mixed Increase firm visibility and political acceptance To support a new equity issue in the foreign market For acquisition of local firms (through a share offer) To use shares for compensation of local management in the foreign affiliate To mitigate possibility of hostile takeover Barriers to Cross-listing Implied increase in commitment to full disclosure and continuing investor relation program particularly important to firms listing in U.S. (stringent disclosure requirement) Lecture 11

I. International Equity Sources cont’d B. New Equity Issues Directed Share Issues:- share issues targeted at investors in a single country and underwritten by firms in that country usually denominated in target country’s currency public issue vs private placement Euro-Equity Issue share issue to foreign investors in more than one market (in bearer form). used by large firms with good credit rating and profitability. recent issues associated with privatization of gov’t enterprises (e.g. British Telecom) sale of foreign affiliate’s shares to investors of host country sale of share to a foreign firm as part of a strategic alliance Lecture 11

II. International Debt Sources 1. Debt Management and Funding Goals Maturing Matching typically, finance current assets through current liabilities long-term assets through long-term liabilities Currency Matching match currency denomination of assets and obligations emphasize cash-flow based matching Cost of Debt comparison of debt sources should be based on effective cost basis for foreign currency denominated debt, the effective cost equals after tax cost of repaying principal plus interest in firm’s home currency Example: U.S. multinational borrows DM3,000,000 for one year at 8% interest. Suppose DM appreciates from DM1.5/$ to DM1.20/$, and the tax rate is 34%. Find dollar cost of debt. Proceeds ($) = DM 3,000,000/ DM 1.5 = $2,000,000 Repayment (DM) = DM 3 million X 1.08 = DM 3,240,000 Repayment ($) = DM 3,240,000/ DM 1.2 = $ 2,700,000 Lecture 11

II. International Debt Sources cont’d Before-tax cost of debt (kd$) = {$2.7 M - $2 M}/ $2 M = 0.35 (35%) After-tax cost of debt = kd$ (1 - t) = 0.35 X 0.66 = 0.231 Generally, kdh = [(1+ kdf) X (1 + s )] - 1 , where s = % change in value of foreign currency (kd$) = [(1+0.08) (1 + 0.25)] - 1 = 0.231 2. International Debt Instruments A. International Bank Loans (Euro Credits) - Sourced in Eurocurrency markets (Note: unbundling as a financial innovation) Eurocurrency: a time deposit of money in an international bank located in a country different from the country that issued the currency. * e.g. Eurodollar deposit - a U.S. dollar denominated bank-deposit outside the U.S. - issued by syndicate of banks and charges floating interest (based on LIBOR) - advantage includes: smaller spread between lending and borrowing rate Reasons: - no reserve requirements - high deposit rate - wholesale market - low lending rate - low risk borrowers - low lending rate Lecture 11

II. International Debt Sources cont’d B. The Euro-note market Euro-notes: short-term unsecured promissory notes issued by corporations and governments, and underwritten by a group of int’l inv’t and commercial banks matures in 3 - 6 months, and costs less in interest expense than Eurocredits Euro-commercial Paper: unsecured short-term promissory note by a corporation or a bank and placed directly with the investment public through a dealer like euronotes, sold at discount from face value e.g. sold a $1000 face value 90-day ECP priced to yield 8% per annum. Determine the proceeds Proceeds + Proceeds [ y/100 X N/360] = face value Proceeds = $1000 / [ 1 + [90/360 X 8/100]] = $980.39 Euro-Medium Term Notes: fixed rate notes issued by a corporation with maturities ranging from less than a year to about 10 years. - coupon paying note and is priced like a bond Lecture 11

II. International Debt Sources cont’d C. The International Bond Market Categories of International Bonds: Foreign Bonds: offered by a foreign borrower to investors in a national capital market and denominated in that nation’s currency e.g. a German MNC issuing $-denominated bond to U.S investors (Yankee bond) Eurobond: denominated in a particular currency but sold to investors in national capital markets other than the country that issued the denominating currency. e.g. a Dutch borrower issuing DM-denominated bond to investors in U.K, Switzerland and Netherlands. Bearer bond (vs registered bond) - in U.S. Yankee bonds and domestic bonds should be registered Advantages of Eurobonds to the issuer include less stringent regulation (foreign bonds regulated as domestic bonds) lower cost of servicing (no withholding taxes, value of anonymity to investor) Lecture 11

II. International Debt Sources cont’d Types of International Bonds: Straight Fixed Rate Bond fixed coupon, set maturity and full principal repayment Pricing: Price = PV of coupon + PV of principal may include option features: callable bond, puttable bond Floating Rate Notes variable coupon (based on a reference rate, e.g. LIBOR) less sensitive to interest rate change compared to straight bond Equity Related Bonds Convertible Bond - provide right to exchange bond to a predetermined # of equity shares of the issuer Bonds with equity warrants - straight bond + a call option on equity Zero-Coupon Bond does not pay coupon interest and sold at discount from face value Dual Currency Bond proceeds and coupon in one currency and repayment in another currency Currency Cocktail Bond denominated in a currency basket such as ECUs, instead of a single currency Lecture 11