1. 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

2. 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

3. 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
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4. 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

5. 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)
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6. 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
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7. 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

8. 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 )] , where s = % change in value of foreign currency
(kd$) = [(1+0.08) ( )] =
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

9. 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 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
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10. 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)
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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