Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 1 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Chapter 11 International Debt

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 2 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Learning Objectives Examine the use of international debt markets as a source of funding Focus on the role of euromarkets and US capital markets Distinguish between eurocurrency, euronote and eurobond markets Consider US debt markets and securities Explain the role of credit rating agencies

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 3 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Chapter Organisation 11.1 Introduction 11.2 The Euromarkets 11.3 Eurocurrency Market 11.4 Euronote Market 11.5 Eurobond Market 11.6 Markets in the USA 11.7 Credit Rating Agencies 11.8 Summary

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 4 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.1 Introduction Who uses international debt markets? – Financial institutions are the largest borrowers – Also used by governments and corporations Investors are attracted to international debt markets as they – Provide a deep and liquid market – Allow higher investment returns – Are a form of portfolio diversification

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 5 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.1 Introduction (cont.) Deregulation of FX markets have contributed to the importance of international debt markets

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 6 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Chapter Organisation 11.1 Introduction 11.2 The Euromarkets 11.3 Eurocurrency Market 11.4 Euronote Market 11.5 Eurobond Market 11.6 Markets in the USA 11.7 Credit Rating Agencies 11.8 Summary

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 7 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.2 The Euromarkets Consist of large unregulated money and capital markets Major centres in London, the Middle East and Asia Euromarket transactions are mainly denominated in a currency other than the currency of the country that issued the debt USD is the dominant currency

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 8 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Chapter Organisation 11.1 Introduction 11.2 The Euromarkets 11.3 Eurocurrency Market 11.4 Euronote Market 11.5 Eurobond Market 11.6 Markets in the USA 11.7 Credit Rating Agencies 11.8 Summary

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 9 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.3 Eurocurrency Market The major forms of eurocurrency facility discussed are – Short-term bank balances – Stand-by arrangements – Medium- to longer-term eurocurrency loans

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 10 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.3 Eurocurrency Market (cont.) Short-term bank advances – Similar to ‘fully-drawn advances’ – Term determined, and full amount drawn-down on approval – Commitment fee may be charged if not drawn- down immediately after approval

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 11 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.3 Eurocurrency Market (cont.) Short-term bank advances (cont.) – May be extended by ‘revolving credit’ where a mixture of currencies can be chosen at each roll-over (i.e. to match borrower’s expected currency inflows) – LIBOR typically used as indicator or reference rate

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 12 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.3 Eurocurrency Market (cont.) Eurocurrency stand-by facilities – A source of ‘back-up’ funds to meet short-term cash shortfalls – Funds more likely to be available offshore in periods of tight domestic liquidity – Short-term finance (up to two years) – Interest charge and commitment fee apply

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 13 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.3 Eurocurrency Market (cont.) Medium- to long-term eurocurrency bank loans – Minimum loan size $3 to $5 million – Larger loans (above $100 million) may involve a syndicate of banks – Term is typically 5 to 10 years

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 14 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.3 Eurocurrency Market (cont.) Medium- to long-term eurocurrency bank loans (cont.) – Loans are usually fully drawn-down at commencement of loan – Interest rate normally above LIBOR and fixed for a period of < 12 months

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 15 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.3 Eurocurrency Market (cont.) Novation, subparticipation and transferable loan certificates – These are forms of quasi-securitisation – Most loans contain a form of sell-down provision i.e. a clause in a loan contract that enables a lender to sell the debt security to another party

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 16 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.3 Eurocurrency Market (cont.) – Most loans contain a form of sell-down provision i.e. a clause in a loan contract that enables a lender to sell the debt security to another party (cont.)  Novation The original lender is able to transfer to a third party all rights and obligations due under the original loan agreement

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 17 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.3 Eurocurrency Market (cont.) – Most loans contain a form of sell-down provision i.e. a clause in a loan contract that enables a lender to sell the debt security to another party (cont.)  Subparticipation A lender retains a loan but, for a price, transfers its rights to receive interest and principal repayments  Transferable loan certificates (TLC) Allows a lender to convert a loan into transferable certificates that have the same terms as the original loan

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 18 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.3 Eurocurrency Market (cont.) Reasons for borrowing in eurocurrency markets – Lower cost of borrowing  Foreign interest rates are often lower than on-shore rates  Borrowing off-shore involves exchange rate risk i.e. for a borrower the local currency may depreciate against the currency in which the loan is denominated; therefore, requiring more foreign funds to be repaid

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 19 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.3 Eurocurrency Market (cont.) Reasons for borrowing in eurocurrency markets (cont.) – Lower cost of borrowing (cont.)  Exchange rate risk can be hedged e.g. 180 day funds are available in Australia at 9% p.a. and the cost of a 180 day eurodollar is 6% p.a. Therefore cost of covering exchange rate risk would be 3% Covered cost of eurodollar funds is 9% (i.e. 6% + 3%)

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 20 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.3 Eurocurrency Market (cont.) Reasons for borrowing in eurocurrency markets (cont.) – A natural hedge can be created e.g.  Exporter has a USD receivable in 180 days  If AUD appreciates, then receivable falls in value  Suppose exporter borrows a similar amount overseas

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 21 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.3 Eurocurrency Market (cont.) Reasons for borrowing in eurocurrency markets (cont.) – A natural hedge can be created e.g. (cont.)  Now, if the AUD appreciates, the exporter makes a foreign exchange gain on the loan, offsetting the loss from the USD receivable

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 22 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.3 Eurocurrency Market (cont.) Reasons for borrowing in eurocurrency markets (cont.) – The sheer size of eurocurrency markets  Large number of potential lenders  Able to borrow large amounts relatively easily

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 23 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.3 Eurocurrency Market (cont.) Reasons for borrowing in eurocurrency markets (cont.) – To develop a profile in eurocurrency markets  This profile may open up longer-term funding options for the firm  Establishes the borrower’s name

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 24 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Chapter Organisation 11.1 Introduction 11.2 The Euromarkets 11.3 Eurocurrency Market 11.4 Euronote Market 11.5 Eurobond Market 11.6 Markets in the USA 11.7 Credit Rating Agencies 11.8 Summary

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 25 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.4 Euronote Market Market for short-term promissory notes (P- notes) Intermediary may purchase and hold the notes or they may be sold into the market Lenders may be prepared to lend larger amounts and for longer terms than for a straight loan

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 26 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.4 Euronote Market (cont.) Three basic types of euronotes – Euronote issuance facility (NIF) – Eurocommercial paper (ECP) – Medium-term notes (MTN) As discount securities, the price of the NIF and an ECP can be calculated using the equations in Chapter 9

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 27 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.4 Euronote Market (cont.) Euronote issuance facility (NIF) – A short-term unconditional bearer promissory note drawn by the borrower in the borrower’s name – Underwriting banks guarantee funds at issue, and convert funding into medium-term through a roll-over facility – Maturity usually 30 to 180 days – Denominated in US$100,000 to US$500,000 equivalents

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 28 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.4 Euronote Market (cont.) Eurocommercial paper (ECP) – Similar to NIF, but funds not underwritten – Stand-by facility used to replace underwriter – Usually less than six dealing institutions (spread geographically and involving different institutional forms) – Credit rating needs to be obtained

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 29 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.4 Euronote Market (cont.) Euro medium-term note (MTN) – Maturity between 9 months and 15 years – Takes the form of bearer securities with annual coupons – Coupon either fixed or variable, at a margin above a nominated indicator rate

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 30 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.4 Euronote Market (cont.) Euro medium-term note (MTN) (cont.) – MTNs vary in terms of maturities, currency, and coupon rates – MTNs are typically issued in USD denominated in USD5,000–10,000 (for retail investors) to USD100,000–1 million (for institutional investors) – Size of facility USD100 million–1 billion

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 31 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Chapter Organisation 11.1 Introduction 11.2 The Euromarkets 11.3 Eurocurrency Market 11.4 Euronote Market 11.5 Eurobond Market 11.6 Markets in the USA 11.7 Credit Rating Agencies 11.8 Summary

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 32 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.5 Eurobond Market Domestic bonds – Bond issue into a local market, in the local currency, by a local company Foreign bonds – Bond issue into a foreign market, in the local currency of that market Eurobonds – Bond issue in a currency other than the currency of the market in which it is issued

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 33 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.5 Eurobond Market (cont.) Eurobonds (cont.) – Underwritten by a multinational syndicate of banks – Not marketed on a single specific national bond market and, thus, not subject to listing and trading regulations imposed on domestic and foreign bond issues  E.g. an Australian company issuing USD denominated bonds into Hong Kong

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 34 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.5 Eurobond Market (cont.) Development of the eurobond market – Investors prefer the anonymity of bearer bonds, as compared to the registered bonds of the USA – Investors may fear changes in regulation of foreign bond issues in the USA – Euromarkets are the most efficient, least costly, most flexible and innovative bond markets

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 35 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.5 Eurobond Market (cont.) Issue and trading of eurobonds – Eurobonds are sold in a multi-stage process organised by an international bank called the lead manager – Lead manager creates a management group by inviting between 5 and 30 banks to be co- managers – Between 30 and 300 underwriters are involved

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 36 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.5 Eurobond Market (cont.) Issue and trading of eurobonds (cont.)

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 37 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.5 Eurobond Market (cont.) Three main types of eurobonds – Straight (fixed coupon) – Floating rate notes – Convertible bonds and warrants

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 38 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.5 Eurobond Market (cont.) Straight (fixed coupon) – A fixed interest bond paying annual coupons, principal repayable at maturity  Sold directly to public (retail), requiring issuer to have highest credit rating  Issue amount USD50–500 million, usually USD

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 39 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.5 Eurobond Market (cont.) Floating rate notes (FRNs) – A bearer bond with a variable coupon rate based on an indicator interest rate  Coupon rate reset periodically, usually six monthly  Issue amount typically USD100 million  FRNs often have a call option and a put option  Further innovation includes perpetual issues without a date

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 40 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.5 Eurobond Market (cont.) Convertible bonds and warrants – Convertible bonds  Holder has the option to convert bond into another form, such as equity or other debt instrument of the issuer Extinguishes the original bond

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 41 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.5 Eurobond Market (cont.) Convertible bonds and warrants (cont.) – Warrants  Holder has the right to purchase other specified securities of the issuer Original bond is not extinguished, but exists until redemption at maturity

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 42 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.5 Eurobond Market (cont.) Calculating the price of fixed-interest euromarket securities – Formula is the same as fixed-interest security formula in Chapter 10 (11.2)

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 43 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Chapter Organisation 11.1 Introduction 11.2 The Euromarkets 11.3 Eurocurrency Market 11.4 Euronote Market 11.5 Eurobond Market 11.6 Markets in the USA 11.7 Credit Rating Agencies 11.8 Summary

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 44 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.6 Markets in the USA Important US securities available are – Commercial paper (USCP) – Medium-term notes – US foreign (Yankee) bonds – American depository receipts (ADRs) The US market is highly innovative and has other products not discussed here

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 45 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.6 Markets in the USA (cont.) Commercial paper (USCP) – Short-term promissory note – Average maturity 20 to 45 days – Denomination in US$100,000 – Some issues are supported by credit enhancements like a bank letter of credit, or security over the assets of the issuer

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 46 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.6 Markets in the USA (cont.) Medium-term notes (MTNs) – An unsecured debt instrument paying a specified coupon, issued in tranches – Range of maturities, but generally longer term – Highly flexible – Issuer able to issue MTNs on a regular basis once registered with the regulatory body (SEC)

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 47 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.6 Markets in the USA (cont.) US foreign (Yankee) bonds – A debt security issued by a foreign borrower into the US market – Denominated in USD – Issued for up to 20 years

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 48 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.6 Markets in the USA (cont.) US foreign (Yankee) bonds (cont.) – Credit rating obtained for each issue  Straight bond—pays equal periodic interest coupons; principal repaid at maturity  Junk bond—issue of securities with a credit rating of less than BBB

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 49 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.6 Markets in the USA (cont.) American depository receipts (ADRs) – A security issued by a US depository bank and evidenced by a depository share – The depository share represents one or more ordinary shares of a foreign issuer listed on the foreign company’s home stock exchange

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 50 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.6 Markets in the USA (cont.) American depository receipts (ADRs) (cont.) – Allows foreign companies to raise capital in US market without needing to meet SEC listing requirements

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 51 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Chapter Organisation 11.1 Introduction 11.2 The Euromarkets 11.3 Eurocurrency Market 11.4 Euronote Market 11.5 Eurobond Market 11.6 Markets in the USA 11.7 Credit Rating Agencies 11.8 Summary

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 52 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.7 Credit Rating Agencies An organisation specialising in assessing the credit quality associated with financial obligations e.g. S&P (Standard and Poor’s) – S&P provide  Long-term credit ratings (AAA to C), with BBB and above being ‘investment grade’  Short-term credit ratings (A-1 to D)  A rating of a corporation overall  Issue-specific credit ratings on the credit worthiness of an obligor with respect to a specific financial obligation

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 53 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.7 Credit Rating Agencies (cont.) An organisation specialising in assessing the credit quality associated with financial obligations e.g. S&P (Standard and Poor’s) (cont.) – Credit ratings of specific issues into international markets include  Country risk—risk that changes in the laws of a foreign currency affect financial transactions  Sovereign risk—risk that a foreign government will default on its obligations

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 54 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.7 Credit Rating Agencies (cont.) An organisation specialising in assessing the credit quality associated with financial obligations e.g. S&P (Standard and Poor’s) (cont.) – Credit ratings of specific issues into international markets include (cont.)  Foreign exchange risk—risk that the value of one currency, relative to another, will change

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 55 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.7 Credit Rating Agencies (cont.) An organisation specialising in assessing the credit quality associated with financial obligations e.g. S&P (Standard and Poor’s) (cont.) – The rating methodology develops a profile balancing business risk and financial risk factors

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 56 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson Chapter Organisation 11.1 Introduction 11.2 The Euromarkets 11.3 Eurocurrency Market 11.4 Euronote Market 11.5 Eurobond Market 11.6 Markets in the USA 11.7 Credit Rating Agencies 11.8 Summary

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 57 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.8 Summary International debt markets are attractive to both investors and borrowers Major eurocurrency facilities include short-term banks balances, stand-by arrangements and medium- to longer-term eurocurrency loans, and are attractive for – The lower cost of borrowing – Creating a natural hedge – The size of the eurocurrency market The euronote market is a market for short-term P- notes and it includes NIF, ECP and MTN

Copyright  2003 McGraw-Hill Australia Pty Ltd PPT Slides t/a Financial Institutions, Instruments and Markets 4/e by Christopher Viney Slides prepared by Anthony Stanger 58 Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by Willis Slides prepared by Kaye Watson 11.8 Summary (cont.) The eurobond market is a market for the issue of bonds in a currency other than the currency of the market of issue and it includes straight (fixed coupon), floating rate notes and convertible bonds and warrants Debt markets in the USA include commercial paper (USCP), medium-term notes, US foreign (Yankee) bonds and American depository receipt (ADRs) Credit rating agencies assess the credit quality of a firm and/or its financial obligations