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Debt Financing
through Eurocurrency Markets, Eurocredits, or Euronotes. through international bonds (Eurobonds, foreign bonds, Global Bonds)
Local Currency Financing through bank loans, non-bank sources, discounting, and parallel loans
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INTERNATIONAL BONDS
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Domestic Bonds
Most countries have some system of financial regulation that applies to securities issued for sale to domestic investors Domestic bonds are issued in a country by a domestic issuer for domestic investors. They are denominated in that country's currency and are subject to that country's regulations.
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International Bonds are bonds that are issued in a country by a nondomestic entity. International bond market is an attractive place to borrow money that fills an important niche in financing
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Foreign Bonds
The Foreign Bond Market
A country's foreign bond market is that market in which the bonds of issuers not domiciled in that country are sold and traded. For example, the bonds of a German company issued in the U.S. or traded on the U.S. secondary markets would be part of the U.S. foreign bond market.
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The definition of "foreign" refers to the nationality of the issuer in relation to the market place. For example, a US dollar bond sold in the United States by the Swedish car producer Volvo is classified as a foreign bond while one issued by General Motors is a domestic bond.
Foreign Bonds
Features of the Foreign Bonds
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Foreign bonds are sold in the currency of the local economy. Foreign bonds are subject to the regulations governing all securities traded in the national market and sometimes special regulations governing foreign borrowers (e.g., additional registration).
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Foreign bonds provide foreign companies access to funds they often 7/7/12 use to finance their operations in the
Foreign Bonds
Foreign bonds are regulated by the domestic market authorities The issuer must satisfy all regulations of the country in which it issues the bonds. The difference between a domestic and a foreign bond is that the issuer of the latter is a foreign entity which may be beyond investors' legal reach in the event of default. Since investors in foreign bonds are usually the residents of the domestic country, investors find them attractivebecause they can add foreign content to their portfolios without the added exchange rate exposure.
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Foreign bonds in the U.S. are called Yankee bonds. Foreign bonds in Japan are called Samurai bonds. Foreign bonds in Spain are called Matador bonds. Foreign bonds in the United Kingdom are called Bulldog bonds. Foreign bonds in the Netherlands are called Rembrandt bonds. 7/7/12
Eurobonds
A Eurobond is not a foreign bond issued within the European Union. Rather, it is a bond issued and traded within the mostly unregulated Euromarket. While that market originated within Europeand is still largely centered there it is a truly international market. Transactions are not subject to any particular nation's regulations. A Eurobond is a bond issued outside the country in whose currency it is denominated.
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A Eurodollar bond thatisdenominated in U.S. dollars and issued in Japan by an Australian company would be an example of a Eurobond. The Australian company in this example could
Eurobonds
Usually, aEurobond is underwritten by a multi-national syndicate of investment banks and simultaneously placed in many countries. For example, to raise funds to finance its European operations, a U.S. company might sell a bond denominated in British pounds throughout Europe. It is categorized according to the
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Eurobonds
Eurobonds are a very popular debt instruments. Volvo, Walt Disney, Nestle, and other multinational corporations finance many of their global operations by selling Eurobonds. Eurobonds are also a source of intermediate and long-term financing of sovereign governments and supranationals (e.g., World Bank and European Investment Bank).
Russia, for example, raised $4B in 1997 7/7/12 through the sale of Eurobonds.
Eurobonds
Eurobonds are attractive financing tools as they give issuers the flexibility to choose the country in which tooffer their bond according to the country's regulatory constraints. They may also denominate their Eurobond in their preferred currency. Eurobonds are attractive to investors as they have small par values and high liquidity.
Currently, about 80% of new issues in the 7/7/12 international bond market are
Eurobond Market
The Eurobond market is handled through an international syndicate consisting of multinational banks, brokers, and dealers. A corporation or government wanting to issue a Eurobond will usually contact a multinational bank who will form a syndicate of other banks, dealers, and brokers from different countries. The members of the syndicate usually agree to underwrite a portion of the issue, which they usually sell to other banks, brokers, and dealers. Market makers handle the secondary market for Eurobonds. 7/7/12 Many of market makers are the same
Eurobond Market
An investor who wants to buy or sell an existing Eurobond can usually contact several market makers in the international OTC market to get several bid-ask quotes, before selecting the best one. While most secondary trading of Eurobonds occurs in the OTC market, many Eurobonds are listed on organized exchanges in Luxembourg, London, and Zurich. These listings are done primarily to accommodate investors from countries that prohibit (or once prohibited) institutional 7/7/12 investors from acquiring securities that are
Eurobond Features
1. Currency Denomination
The generic, plain vanilla Eurobond pays an annual fixed interest and has a longterm maturity. There are a number of different currencies in which Eurobonds are sold. The major currency denominations are the U.S. dollar, yen, and euro. (70 to 75 percent of Eurobonds are denominated in the U.S. dollar.) The central bank of a country can protect its currency from being used. Japan, for example, prohibited the yen from being used for Eurobond issues of its 7/7/12 corporations until 1984.
Eurobonds are usually issued from countries in which there is little regulation. As a result, many Eurobonds are unregistered, issued as bearer bonds.
(Bearer form-unregistered, no record to identify the owners, usually kept on deposit at depository institution)
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While this feature provides confidentiality, it has created some problems in countries such as the U.S., where regulations require that security owners be registered on the books of issuer.
Eurobond Features
3. Credit Risk
Compared to domestic corporate bonds, Eurobonds have fewer protective covenants, making them an attractive financing instrument to corporations, but riskier to bond investors. Eurobonds differ in term of their default risk and are rated in terms of quality ratings.
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The maturities on Eurobonds vary. Many have intermediate terms (2 to 10 years), referred to as Euronotes, and long terms (10-30 years), called Eurobonds. There is also short-term Europaper and Euro Medium-term notes.
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Eurobond Features
5. Other Features
1.
Like many securities issued today, Eurobonds often are sold with many innovative features. For example:
Dual-currency Eurobonds pay coupon interest in one currency and principal in another. Option currency Eurobond offers investors a choice of currency. For instance, a sterling/Canadian dollar bond gives the holder the right to receive interest and principal in either currency.
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A number of Eurobonds have special conversion features One type of convertible is a dualcurrency bond that allows the holder to convert 7/7/12 the bond into stock or another bond that is
A number of Eurobonds have special warrants attached to them. Some of the warrants sold with Eurobonds include those giving the holder the right to buy stock, additional bonds, currency, or gold. There are also floating-rate Eurobonds with the rates often tied to the LIBOR and floaters with the rate capped.
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The Eurobond market has also issued zero discount bonds, and at one time, perpetual 7/7/12 Eurobonds with no maturities were issued; they,
Eurobond Features
EUROBONDS are issued by borrowers on the unregulated (or gently regulated) external capital markets. Usually, Eurobonds are:
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issued in bearer form, (Bearer form-unregistered, no record to identify the owners, usually kept on deposit at depository institution) pay annual (as opposed to semiannual) coupons, Free of withholding tax - Interest must be paid free of withholding tax. Free of national regulation - Structured so that national authorities cannot control their issuance have call provisions. also carry convertibility clauses, or have
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and
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Global bonds
Arbitrage between the foreign bond and Eurobond markets lead to the development of global bonds. These are bonds that blend characteristics of foreign bonds and Eurobonds and are issued in both markets simultaneously. A Global Bonds is both a foreign bond and a Eurobond. It is issued and traded as a foreign bond (being registered in a country) and also it is sold through a Eurobond syndicate as a Eurobond.
Unlike Eurobonds, global bonds can be issued in the same currency as the country of issuance. For example, a global bond could be both issued in the United States and 7/7/12 denominated in U.S. dollars.
Global bonds
The first global bond issued was a 10year, $1.5 billion bond sold by the World Bank in 1989. This bond was registered and sold in the U.S. (Yankee bond) and also in the Eurobond market. Currently, U.S. borrowers dominate the global bond market, with an increasing number of these borrowers being U.S. federal agencies. Global bonds are usually issued by entities that have high credit ratings The market has grown from a $30 billion market in the early 1990s to a $100 billion one in the late 1990s.
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Eurocurrencies
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Eurocurrency Market
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Eurocurrency Market
The Eurocurrency market is the money market equivalent of the Eurobond market. Eurocurrency is any currency that is banked outside of its country of origin (Eurodollars are dollars banked outside the US) It is a market in which funds are intermediated (deposited or loaned) outside the country of the currency in which the funds are denominated.
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Eurocurrency Market
Eurocurrency deposits and loans represent intermediation occurring in the Eurocurrency market. Even though the intermediation occurs in many cases outside Europe, the Euro prefix usually remains. An exception is the Asian dollar market. This market includes banks in Asia that accept deposits and make loans in foreign currency; this market is sometimes referred to separately as the Asian dollar market.
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Today the total amount of Eurocurrency deposits is estimated to be in excess of $2 trillion. The actual size of the market, though, is difficult to determine because of the lack of regulation and disclosure. By most accounts, though, it is one of the largest financial markets.
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The underlying reason for the existence of a Eurocurrency markets is that Eurocurrency loan and deposit rates are better than the rates on similar domestic loans and deposits because of the differences that exist in banking and security laws among countries.
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If the U.S.'s reserve requirement were 5% on time deposits for a certain size bank, while no requirements existed in the Bahamas, then a U.S. bank, by accepting a domestic deposit, could only loan out 95% of the deposit, earning 95% of the loan rate, in contrast to a Bahamian deposit in which 100% of the deposit could be loaned out to earn the full amount of the loan rate. In a competitive market for deposits and loans, the rates on the Bahamian loans and deposits would have to be made more favorable, since a depositor or borrower would prefer his own country. Thus, the absence of reserve requirements or regulations on rates paid on deposits in the Bahamas, 7/7/12 for example, makes it possible for the rates on
Eurocurrency CDs are denominated in currencies outside the currency's country. The maturities on Eurocurrency CDs range from one day to several years, with the most common maturities being 1, 3, 6 and 12 months.
The rates on the CDs are usually negotiated between the 7/7/12 investor/depositor and the bank and they
The rates frequently are quoted relative to the LIBOR. (Asian dollar CDs are quoted in terms of the Singapore Interbank Offer Rate (SIBOR)).
London Inter-Bank Offered Rate (LIBOR) interest rate that banks charge each other on Eurocurrency loans
Rates on Eurodollar CDs are typically higher than the rates on comparable domestic CDs. 7/7/12 Primary deposits are time deposits
Foreign governments or individuals Multinational corporations European banks Countries with large balance-of-trade surpluses
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The Eurocurrency market is an important funding source for corporations and governments. The loans to corporations and governments can be either short-term or intermediate, ranging in maturity from overnight to 10 years. The loans with maturities of over one year are called Eurocredits or Eurocredit loans.
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Loans can be either fixed or floating Loans can be in different currencies and have different currency clauses Many of the larger loans are provided by a syndicate of Eurobanks
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Characteristics of Eurocurrency market completely unregulated offshore market both short and medium term Eurocurrency deposits yield higher interest Eurocurrency loans tend to be cheaper Loans are made on a floating rate basis; six months rollover Many loans have Multicurrency clauses -borrower has the right to 7/7/12
In the Eurobond market, Eurobonds are directly issued by the final borrowers Eurocurrency market has commercial banks which holds deposits of investors and lends this money to the final borrowers.
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In addition to issuing stock locally, multinationals can also obtain funds by issuing stock in international markets. This will enhance the firms image and name recognition, and diversify their shareholder base. A stock offering may also be more easily digested when it is issued in several markets.
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A firm must choose one or more stock markets on which to cross-list its shares and sell new equity. Just where to go depends mainly on the firms specific motives and the willingness of the host stock market to accept the firm. The locations of an multinationals operations can influence the decision about where to place its stock, in view of the cash flows needed to cover dividend payments. Market characteristics are important too. Stock markets may differ in size, trading activity level, and proportion of individual 7/7/12 versus institutional share ownership.
Improve the liquidity of its existing shares and support a liquid secondary market for new equity issues in foreign markets Increase its share price by overcoming mis-pricing in a segmented and illiquid home capital market Increase the firms visibility Establish a secondary market for shares used to acquire other firms Create a secondary market for shares that can be used to compensate local management and employees in foreign subsidiaries
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Stock issued in the U.S. by non-U.S. firms or governments are called Yankee stock offerings. Non-U.S. firms may also issue American depository receipts (ADRs), which are certificates representing bundles of stock. American depository receipts (ADRs) are certificates traded in the United States and denominated in US dollars.
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Receipts (ADRs)
Shares
Arbitrag e Activity
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Internal
External
Debt
Equit y
Debt
Equit y
Home Currency Foreign Currency
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Home Currency
Foreign Currency
Internal Debt vs. Internal Equity The primary tradeoffs between internal debt
and internal equity center around taxes. If internal debt is used, interest payments made from the subsidiary to the parent are treated on a pre-tax basis in the host country. If internal equity is used, dividends repatriated from the subsidiary to the parent are treated on a post-tax basis. Generally, home country gives a tax-credit on foreign taxes paid on repatriated dividends of up to (but no more than) the home country tax bill on the dividends.
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political risks (i.e. probability of expropriation) are likely to be reduced. political risks are likely to be more systematic to risks of host country shareholders portfolios.
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local currency, it faces greater exchange rate risk. The cost of financing in the local currency will consist (approximately) of the local currency interest rate premium and the expected exchange rate change.
The differential can be interpreted as the extent to which the firm accesses a homecurrency financing advantage in excess of anticipated exchange rate changes. This 7/7/12 will be traded-off against the larger
Key Points
1. Primary tradeoff of internal debt vs. equity is between the tax-shield benefit of debt and the flexibility of equity dividend repatriation. 2. Firms will tend to favor debt when parent earnings are volatile, subsidiary earnings are certain, and subsidiary tax rates are high. 3. With external financing, debt provides advantages over equity to the extent it offers tax shields, interest subsidies, and monitoring benefits.
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Key Points
4. When financing with external equity, firms will likely face higher equity costs of capital in the host country market. 5. Local equity will also often alter the magnitudes and pricing of political risks associated with the project. 6. In the debt denomination decision, an MNC which centralizes borrowing in home country is likely to get more-favorable rates.
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Key Points
7. MNCs which borrow in the currency of the project produce a natural hedge, offsetting project returns with debt obligations, and hence facing less exchange rate and political risk.
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