1 International Debt Markets (or part II of chapter 13)

2 Agenda  What is Eurocurrency?  International debt market instruments: Bank loans & Syndicated Credits. Euro-note Market Instruments. International Bond Market Instruments.  Project financing.

3 Eurocurrency Markets  Eurocurrencies: domestic currencies of one country on deposit in 2 nd country. Pros: flexible maturities & higher yields & gov’t regulation-free. E.g.: Eurosterling, Euroeuro,Euroyen, Eurodollar.  Eurodollar deposits =/= demand deposits! Can’t transfer by check. Underlying balance US correspondent bank.  History: why Eurocurrency market so popular? Eastern-Europe holders post-WW2 deposited US$ funds in London. Central banks kept reserves in Eurodollar deposits. 1957: Bank of England imposed tight controls on sterling lending. 1960s: US BOP problems segmented US debt market.

4 International Debt Markets Bank Loans & Syndications (floating-rate, short-to-medium term) Eurocredits. Syndicated Credits. International Bank Loans. Eurocommercial Paper (ECP). Euro Medium Term Notes (EMTN). Euronotes. Euronote Market (floating-rate, short-to-medium term) Foreign Bond: Yankee, Samurai. Eurobond. - straight fixed-rate issue. - floating-rate note (FRN). - equity-related issue. International Bond Market (fixed & floating-rate, medium-to-long term)

5 Bank Loans & Syndicated Credits  Eurocredits Loans denominated in eurocurrencies & extended by banks in countries other than country of denominating currency. Tied to LIBOR. Short-term maturities: ~ 6 months. Narrow spreads, usually less than 100 basis points.  Syndicated credits Arranged by lead bank w/ other banks participation. Interest expense tied to LIBOR. Upfront fee. Commitment fee (on unused portion).

6 Euronote Market  Medium- & short- term debt instruments.  Two types –Underwritten facilities. –Non-underwritten facilities: Euro-commercial paper (ECP) & Euro Medium-term notes (EMTN)  Euronote Short-term, negotiable promissory notes in eurocurrency. E.g.: Revolving Underwriting Facility & Note Issuance Facility. Cheaper than syndicated loans. Why?  Euro-commercial paper (ECP) –Maturities of 1,3, & 6 months.  Euro Medium-term notes (EMTN) –Maturities: 9 months to 10 years. –Allows continuous issuance. –Coupons paid on set calendar dates. –Issued in small chucks ($2-5m).

7 International Bond Market  World bond market 50% larger than world equity market.  Bonds currencies 2001: US$ (49%), Euro (37%) & Yen (5%).  Popular: no regulatory interference, lax disclosure, tax anonymity.  Bond types: Eurobonds –Sold to investors in national capital markets other than country of denominating currency. –E.g. Evian (France) issues $-denominated bonds in UK & Japan. –Types: –Straight Fixed-rate issue. –Floating rate note (FRN). –Equity related issue – convertible bond. Foreign bonds –Sold w/in country of denominated currency, however issuer is from another country. –E.g. Air Portugal offers bond in US priced in $. –Include: Yankee bonds (sold in US), Samurai bonds (Japan), & Bulldogs (UK).

8 Currencies to denominate bonds? (in US$ billions) US$791.81,131.9 Euro Yen Other currencies Source: BIS Quarterly Review, December 2002

9 Types of Eurobonds issued? (in US$ billions) Floating rate Fixed rate1,128.71,590.7 Equity-related Source: BIS Quarterly Review, December 2002

10 Eurobonds  Straight Fixed Rate Debt “Plain vanilla” bond w/ specified coupon & maturity. Most Eurobonds are bearer bonds => coupon dates annual.Why? Vast majority (65+%) of new international bond offerings are straight fixed-rate.  Floating Rate Notes (FRN) Like adjustable rate mortgage. Allows shifting interest rate risk to borrower. Reference rates are 3- & 6-month US$ LIBOR.  Equity-Related Bonds Convertibles –Allow exchange bond for shares in issuer’s firm. lower coupon rate of interest. Why? Bonds w/ equity warrants –Allow holder keep bond & buy shares in issuer’s specified price.

11 Eurobond Credit Ratings  Main providers: Moody’s, Fitch, Standard & Poor’s. Moody’s: nine categories from Aaa to C. Investment grade ratings: Aaa  Baa.  Focus on default risk, not exchange rate risk.  Default rate is higher for foreign currency debt than local currency debt.  Inflation is key factor.

12 US Regulation on Int’l Bonds  Eurobonds: US citizen cannot buy them in US primary market => U.S. citizen could buy on secondary market.  Yankee bonds: Yankee bonds sold to US citizens are registered.  Bearer vs. Registered: No registration for bearer bonds. => Investor anonymity. Opens door for tax evasion…  Tax Concerns: until 1984, US had 30% withholding tax on interest to nonresident holder of US T-bonds.

13 Project Financing  Financing arrangement for long-term, large-scale capital projects, generally w/ high risk.  Used by MNE in development of infrastructure projects in emerging markets  Projects highly leveraged (60+% debt). Why? Scale of project precludes single equity investor. Many projects funded by governments.

14 Project Financing Characteristics  Separation of project from its investors –Project legally & financially separate. –Allows project to obtain own credit rating & cash flows.  Long-lived & capital intensive  Cash flow predictability from third-party commitments –Third party commitments are usually suppliers or customers of project  Finite projects with finite lives

15 Things to remember…  What is Eurocurrency?  International debt market instruments: Bank loans & Syndicated Credits. Euro-note Market Instruments. International Bond Market Instruments.  Project financing.