1. Copyright ©2003 Ian H. Giddy Global Banking and Lending Connexion loan Tuesday: Bank and Bond Financing Don Pedro Hydro Westpac Eurobonds Cap des Biches

2. Copyright ©2003 Ian H. Giddy Global Banking and Lending Cap des Biches: Choices for the BCEAO l Foreign-exchange intervention l Money-market intervention (consider interaction with monetary policy) l Fiscal policy--the demand side l Tariffs and subsidies l Exchange controls and capital controls (and jawboning)

3. Copyright ©2003 Ian H. Giddy Global Banking and Lending Cap des Biches: Choices for GTI-Dakar “We must decide whether it’s worth covering our dollar exposure, given the forward premium and relative interest rates.”

4. Copyright ©2003 Ian H. Giddy Global Banking and Lending Cap des Biches: Choices for GTI-Dakar “We must decide whether it’s worth covering our dollar exposure, given the forward premium and relative interest rates.” n What is the probability of a devaluation? n How much? n What should GTI-Dakar do?

5. Copyright ©2003 Ian H. Giddy Global Banking and Lending Cap des Biches: Choices for GTI-Dakar n Renegotiate the $30 million loan, replacing it with a loan denominated in Euros n Keep the USD loan in place, but enter into a 6-year currency swap to effectively convert GTI's payments into Euros. n Hedge the dollar-Euro risk by buying dollars forward, with rolling 3-month forward contracts n Hedge against a possible devaluation of the CFA franc, by selling francs in the 3-month forward market. n Leave the dollar loan unhedged, and pass the cost of any foreign exchange losses on to Senelac, the buyer of GTI's power n Do nothing now but watch the situation carefully and hedge if the risk becomes too great.

6. Global Banking: Strategy & Techniques Prof. Ian GIDDY Stern School of Business New York University

7. Copyright ©2003 Ian H. Giddy Global Banking and Lending Products or Customers? Sales Capital Markets Corporate Finance Customer-Driven Innovation

8. Copyright ©2003 Ian H. Giddy Global Banking and Lending Client-Arena-Product Matrix Products offered Clients served Markets covered

9. Copyright ©2003 Ian H. Giddy Global Banking and Lending Products l Credit products l Trading and positioning l Risk management products l Financial engineering and structured finance l Underwriting and distribution l Asset management l Retail and private client services l Transactions services

10. Copyright ©2003 Ian H. Giddy Global Banking and Lending Alternative Bank-Industry Linkages The Equity- Market System The Bank- Based System The Bank- Industrial Crossholding System The State- centered System Investment Vehicles Industrial Companies Individuals Banks Individuals Banks / Investment Vehicles Industrial Companies Individuals Investment Vehicles & Insurance Industrial Companies Banks Individuals Investment Vehicles & Insurance Banks / Investment Vehicles Industrial Companies State Institutions

11. Copyright ©2003 Ian H. Giddy Global Banking and Lending Product Profitability Cycle Excess returns Time

12. Copyright ©2003 Ian H. Giddy Global Banking and Lending Client-Arena-Product Matrix Products offered Clients served Markets covered Build versus buy?

13. Copyright ©2003 Ian H. Giddy Global Banking and Lending Client-Arena-Product Matrix Products offered Clients served Markets covered Deutsche Bank in USA

14. Copyright ©2003 Ian H. Giddy Global Banking and Lending Client-Arena-Product Matrix Products offered Clients served Markets covered Sell?

15. Copyright ©2003 Ian H. Giddy Global Banking and Lending Complementarity and Cross-Selling Wholesale Retail Insurance Asset Management Citigroup?

16. Copyright ©2003 Ian H. Giddy Global Banking and Lending Client-Arena-Product Choices for West Afrtican Banks? Products offered Clients served Markets covered ?

17. International Bank Financing Prof. Ian Giddy New York University

18. Copyright ©2003 Ian H. Giddy Global Banking and Lending International Banking and Credit l International Banking and the Eurocurrency Market l The Separability of Pricing from Commitment Periods l The Syndication Technique in International Lending l Transferability and Trading of Loans l Note Issuance Facilities l Euro-commercial Paper l Floating-rate Notes

19. Copyright ©2003 Ian H. Giddy Global Banking and Lending Interest-Rate Parity $1 (1 + i E$ ) = ($1/ S t )(1 + i EBP ) F n t where S t is the spot exchange rate (dollars per British Pound) and F n t is the forward rate. Or, to a close approximation, (i E$ - i EBP ) = [(F n t - S t )/S t ] (365/n) 100 Interest-rate differential = forward premium or discount

20. Copyright ©2003 Ian H. Giddy Global Banking and Lending Asset-Liability Management AssetsLiabilities Loans n Floating rate n Fixed rate Loans n Floating rate n Fixed rate Deposits n Short term n Long term Deposits n Short term n Long term

21. Copyright ©2003 Ian H. Giddy Global Banking and Lending Asset-Liability Management AssetsLiabilities Loans n Floating rate n Fixed rate Loans n Floating rate n Fixed rate “Bought money”

22. Copyright ©2003 Ian H. Giddy Global Banking and Lending Asset-Liability Management AssetsLiabilities Loans n Floating rate n Fixed rate Loans n Floating rate n Fixed rate Active money market trading Active money market trading

23. Copyright ©2003 Ian H. Giddy Global Banking and Lending Loan Pricing: Basis and Margin AssetsLiabilities Loans n Prime rate Loans n Prime rate Domestic deposits Domestic deposits

24. Copyright ©2003 Ian H. Giddy Global Banking and Lending Loan Pricing: Basis and Margin AssetsLiabilities Loans n Prime rate Loans n Prime rate Domestic deposits Domestic deposits Loans n Libor-based Loans n Libor-based Wholesale deposits Wholesale deposits

25. Copyright ©2003 Ian H. Giddy Global Banking and Lending Transferability of Loans and Off- Balance Sheet Banking

26. Copyright ©2003 Ian H. Giddy Global Banking and Lending The Syndication Technique in International Lending l Syndication is the underwriting and distribution of large bank loans, a distribution method adapted from the securities underwriting business l Risk reduction in syndicated loans: 1. Credit analysis 2. Monitoring and control 3. Taking a smaller amount of more, diversified assets 4. Relying on the monitoring role of the lead bank or banks. l Better information about 1. Aggregate amount of lending to any one borrower (especially a country) 2. Terms and conditions of other segments of the loan and of other lending to the same borrower.

27. Copyright ©2003 Ian H. Giddy Global Banking and Lending Trading and Transferring Loans ASSIGNMENT FULL ASSIGNMENT The sale of all of the originating lender’s or assignor’s rights and interest in a credit facility to a purchaser or assignee. FULL ASSIGNMENT The sale of all of the originating lender’s or assignor’s rights and interest in a credit facility to a purchaser or assignee. ASSIGNMENT WITH NOVATION ASSIGNMENT WITH NOVATION PARTICIPATION Participants have derivative rights, not direct rights against (or obligations to) the borrower. PARTICIPATION Participants have derivative rights, not direct rights against (or obligations to) the borrower. n LIMITED VOTING PARTICIPATION n FULL VOTING PARTICIPATION n FULL PASS-THROUGH PARTICIPATION n LIMITED VOTING PARTICIPATION n FULL VOTING PARTICIPATION n FULL PASS-THROUGH PARTICIPATION

28. Copyright ©2003 Ian H. Giddy Global Banking and Lending Trading and Transferring Loans ASSIGNMENT FULL ASSIGNMENT The sale of all of the originating lender’s or assignor’s rights and interest in a credit facility to a purchaser or assignee. FULL ASSIGNMENT The sale of all of the originating lender’s or assignor’s rights and interest in a credit facility to a purchaser or assignee. ASSIGNMENT WITH NOVATION ASSIGNMENT WITH NOVATION PARTICIPATION Participants have derivative rights, not direct rights against (or obligations to) the borrower. PARTICIPATION Participants have derivative rights, not direct rights against (or obligations to) the borrower. n LIMITED VOTING PARTICIPATION n FULL VOTING PARTICIPATION n FULL PASS-THROUGH PARTICIPATION n LIMITED VOTING PARTICIPATION n FULL VOTING PARTICIPATION n FULL PASS-THROUGH PARTICIPATION In a full assignment: l The borrower usually acknowledges the assignment l The borrower must consent to release of obligation by the assignor l The assignee has direct access and enforcement of rights against the borrower l The loan agreement and note is transferred to assignee at closing In a full assignment: l The borrower usually acknowledges the assignment l The borrower must consent to release of obligation by the assignor l The assignee has direct access and enforcement of rights against the borrower l The loan agreement and note is transferred to assignee at closing

29. Copyright ©2003 Ian H. Giddy Global Banking and Lending Trading and Transferring Loans ASSIGNMENT FULL ASSIGNMENT The sale of all of the originating lender’s or assignor’s rights and interest in a credit facility to a purchaser or assignee. FULL ASSIGNMENT The sale of all of the originating lender’s or assignor’s rights and interest in a credit facility to a purchaser or assignee. ASSIGNMENT WITH NOVATION ASSIGNMENT WITH NOVATION PARTICIPATION Participants have derivative rights, not direct rights against (or obligations to) the borrower. PARTICIPATION Participants have derivative rights, not direct rights against (or obligations to) the borrower. n LIMITED VOTING PARTICIPATION n FULL VOTING PARTICIPATION n FULL PASS-THROUGH PARTICIPATION n LIMITED VOTING PARTICIPATION n FULL VOTING PARTICIPATION n FULL PASS-THROUGH PARTICIPATION In a participation: l The lead bank sells the right to participate in a credit facility or loan l Participants have derivative rights, not direct rights against (or obligations to) the borrower l Counterparty risk exists for lead bank (eg lead bank responsible for funding participants’ shares) l Capital rules may affect lead bank In a participation: l The lead bank sells the right to participate in a credit facility or loan l Participants have derivative rights, not direct rights against (or obligations to) the borrower l Counterparty risk exists for lead bank (eg lead bank responsible for funding participants’ shares) l Capital rules may affect lead bank

30. Copyright ©2003 Ian H. Giddy Global Banking and Lending The Separability of Pricing from Commitment Periods l The Eurocurrency market permits the separation of the currency of denomination from the country of jurisdiction. l A seemingly simple loan has inherent a large number of different features and aspects of risk, including  pricing (over short-term LIBOR)  commitment (medium term)  funding the loan l International bankers isolate these features in order to distribute and to hedge the inherent risks

31. Copyright ©2003 Ian H. Giddy Global Banking and Lending The International Money Markets Source: ft.com

32. Copyright ©2003 Ian H. Giddy Global Banking and Lending Pricing a Loan to BHP What maturity and currency do they want to borrow? Get USD Libor as cost-of-funds proxy USD What is the credit quality of this borrower? Set an appropriate spread over Libor A- Price the loan

33. Copyright ©2003 Ian H. Giddy Global Banking and Lending Pricing a Loan to BHP Get USD Libor as cost-of-funds proxy USD Set an appropriate spread over Libor A- Price the loan www.marketprices.ft.com/markets/currencies/money pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ratings.htm

34. Copyright ©2003 Ian H. Giddy Global Banking and Lending Funding the Australian Loan Three ways to fund: l Take domestic Aussie dollar deposit l Take EuroA$ deposit 3 MO A$ DEP 3 MO A$ DEP

35. Copyright ©2003 Ian H. Giddy Global Banking and Lending Funding the Australian Loan Three ways to fund: l Take domestic Aussie dollar deposit l Take EuroA$ deposit l Fund with dollars, hedged into Aussies l Take E$ deposit l Do FX swap: sell USD spot, buy USD forward 3 MO E$ DEP FX SWAP 3 MO E$ DEP FX SWAP

36. Copyright ©2003 Ian H. Giddy Global Banking and Lending Raising the Money: Note Issuance Facilities A Note Issuance Facility has two tiers l Tender panel members (who provide funds) l Underwriters (commit to the availability of credit)

37. Copyright ©2003 Ian H. Giddy Global Banking and Lending A Revolver RUF Structure:  Arranger  Underwriting banks  Tender panel  Agent

38. Copyright ©2003 Ian H. Giddy Global Banking and Lending Laura Ashley Need lots of money fast? Have trouble accessing CP market? Arrange syndicated credit YES Confident of always being able to access the short-term market? Arrange Euronote program YES Arrange RUF or MOF: Underwritten Euronote program Need funds? Don’t issue paper NO Cannot sell paper at L+10bp? Borrow from banks YES Issue Euronotes or other paper

39. Copyright ©2003 Ian H. Giddy Global Banking and Lending Comparison of RUF to Put Option Market spread relative to LIBOR at which the borrower can issue short term paper. Gain or loss relative to having no underwritten facility FEES CAP SPREAD LIBOR FLAT 0 + - Borrower issues Euronotes Borrower draws on underwritten facility "STRIKE PRICE"

40. Copyright ©2003 Ian H. Giddy Global Banking and Lending Euro-commercial Paper l ECP is an unsecured promissory note, issued and placed outside the jurisdiction of the currency of denomination. l A Eurocommercial paper facility  By definition, the facility provides only for the best-efforts auction of paper; the borrower has no underwritten assurance of availability of funds  Today, most committed facilities are used by those who want a medium term back-up line on which they do not intend to draw--often to back up a U.S. commercial paper facility.  Uncommitted Euro-commercial paper or U.S. commercial paper facilities are used for actually raising funds.

41. Copyright ©2003 Ian H. Giddy Global Banking and Lending International Bank Lending DOMESTIC LOANS DOMESTIC LOANS

42. Copyright ©2003 Ian H. Giddy Global Banking and Lending International Bank Lending DOMESTIC LOANS DOMESTIC LOANS EUROMARKET LOANS EUROMARKET LOANS

43. Copyright ©2003 Ian H. Giddy Global Banking and Lending International Bank Lending DOMESTIC LOANS DOMESTIC LOANS EUROMARKET LOANS EUROMARKET LOANS SYNDICATED EUROCREDITS SYNDICATED EUROCREDITS

44. Copyright ©2003 Ian H. Giddy Global Banking and Lending International Bank Lending DOMESTIC LOANS DOMESTIC LOANS EUROMARKET LOANS EUROMARKET LOANS SYNDICATED EUROCREDITS SYNDICATED EUROCREDITS NOTE ISSUANCE FACILITIES NOTE ISSUANCE FACILITIES

45. Copyright ©2003 Ian H. Giddy Global Banking and Lending International Bank Lending DOMESTIC LOANS DOMESTIC LOANS EUROMARKET LOANS EUROMARKET LOANS SYNDICATED EUROCREDITS SYNDICATED EUROCREDITS NOTE ISSUANCE FACILITIES NOTE ISSUANCE FACILITIES EUROCOMMERCIAL PAPER EUROCOMMERCIAL PAPER

46. Copyright ©2003 Ian H. Giddy Global Banking and Lending Case Study: Connexion l Would you advise Connexion to use a syndicated loan to finance its prospective acquisition? l If so, how would it be structured and distributed? l How should the bank evaluate and price the risk?

47. Copyright ©2003 Ian H. Giddy Global Banking and Lending Connexion: Group Questions 1. From the perspective of Connexion, what are their main objectives for this financing? 2. What would be the most appropriate product to offer Connexion? 3&10. How was the financing structured? 4. What issues come to mind regarding pricing? 5. How are the banks protected against risks? 6. After the loan is done, what are the main benefits to the bank, Soc Gen? 7. What are the benefits to the other banks? 8. What could go wrong? 9. Soc Gen: how much profit?

48. Copyright ©2003 Ian H. Giddy Global Banking and Lending Connexion loan Tuesday: Bank and Bond Financing Don Pedro Hydro Westpac Eurobonds Cap des Biches

49. Copyright ©2003 Ian H. Giddy Global Banking and Lending

50. Copyright ©2003 Ian H. Giddy Global Banking and Lending Contact Info Ian H. Giddy NYU Stern School of Business Tel 212-998-0426; Fax 212-995-4233 Ian.giddy@nyu.edu http://giddy.org