1. Copyright ©2003 Ian H. Giddy The Global Bond Market 1 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?

2. Copyright ©2003 Ian H. Giddy The Global Bond Market 2 Connexion loan Tuesday: Bank and Bond Financing Don Pedro Hydro Westpac Eurobonds Cap des Biches

3. The Global Bond Market Prof. Ian GIDDY Stern School of Business New York University

4. Copyright ©2003 Ian H. Giddy The Global Bond Market 4 Case Study: Westpac Bond Financing  Why would Westpac issue a US dollar Eurobond?  Why has the bank issued other kinds of bonds?  How would you explain the Eurobond issuance process and costs to an issuer?  What would be involved in getting a rating for the company?

5. Copyright ©2003 Ian H. Giddy The Global Bond Market 5 The International Capital Market l International bank financing l Eurobonds, foreign bonds and global bonds l Project financing

6. Copyright ©2003 Ian H. Giddy The Global Bond Market 6 Short-Term Financing: Evolution INTERMEDIATED DIRECT ENHANCED BANK LOANS COMMERCIAL PAPER BANK L/Cs

7. Copyright ©2003 Ian H. Giddy The Global Bond Market 7 Alternative Sources of Short-Term Financing FINANCING DEBTEQUITY DOMESTIC LOANS DOMESTIC LOANS EUROMARKET LOANS EUROMARKET LOANS SYNDICATED EUROCREDITS SYNDICATED EUROCREDITS NOTE ISSUANCE FACILITIES NOTE ISSUANCE FACILITIES EUROCOMMERCIAL PAPER EUROCOMMERCIAL PAPER

8. Copyright ©2003 Ian H. Giddy The Global Bond Market 8 Alternative Sources of Long-Term Financing FINANCING DEBTEQUITY l Bank credits - syndicated lending and facilities l Bonds  Domestic, foreign, Euro  Public, private  Structured, such as principle-indexed notes l Medium-term notes l Asset-backed financing and leasing l Project financing

9. Copyright ©2003 Ian H. Giddy The Global Bond Market 9 Long-Term Financing: Evolution INTERMEDIATED DIRECT ENHANCED BANK TERM LOANS PUBLIC BONDS BANK-GUARANTEED BONDS

10. Copyright ©2003 Ian H. Giddy The Global Bond Market 10 The Global Bond Market l Domestic bonds l Foreign bond (Issued within country of currency, by non- resident issuers) l Eurobonds (Issued and sold in a jurisdiction outside the country of the currency of denomination) l Global Bonds (Issued in the domestic and the Eurobond markets simultaneously)

11. Copyright ©2003 Ian H. Giddy The Global Bond Market 11 The Global Bond Market l Domestic bonds l Foreign bond (Issued within country of currency, by non- resident issuers) l Eurobonds (Issued and sold in a jurisdiction outside the country of the currency of denomination) l Global Bonds (Issued in the domestic and the Eurobond markets simultaneously)

12. Copyright ©2003 Ian H. Giddy The Global Bond Market 12 International Bond Markets are Linked l Issuers and investors compare terms in the domestic and Eurobond markets, which are linked across currencies via currency swaps BOND MARKETS WITHIN COUNTRY OF CURRENCY BOND MARKETS OUTSIDE COUNTRY OF CURRENCY Currency Swaps Long-dated Forward Exchange Domestic US -Gov't -Corporate Foreign Bonds "Yankee" Domestic Japanese -Gov't -Corporate Foreign Bonds "Samurai" Eurodollar Bond Market Euroyen Bond Market

13. Copyright ©2003 Ian H. Giddy The Global Bond Market 13 Foreign Bonds l A foreign bond is a bond issued in a host country's financial market, in the host country's currency, by a foreign borrower l The three largest foreign bond markets are Japan, Switzerland, and the U.S., representing issuance of about $40 billion in bonds annually

14. Copyright ©2003 Ian H. Giddy The Global Bond Market 14 Private Placements and Rule 144A The private placement exemption from registration and disclosure is extended to Eurobonds as long as the U.S. investors meet the following requirements:  They are large and sophisticated  There are only a few investors  They have access to information and analysis similar to that which would ordinarily be contained in a registered offering prospectus  They are capable of sustaining the risk of losses, and  They intend to purchase the bonds for their own investment portfolios, and not for resale.

15. Copyright ©2003 Ian H. Giddy The Global Bond Market 15 Characteristics of Eurobonds l Issued outside country of currency l Not subject to domestic registration or disclosure requirements l In most cases take form of private placements l Placed through syndicates in many countries who sell principally to nonresidents l Bonds are structured so as to be free of withholding tax l Bearer form But... l Eurobonds usually influenced de facto by government and banks of country of currency

16. Copyright ©2003 Ian H. Giddy The Global Bond Market 16 Pricing Bonds: The Yield Curve bondsonline.com

17. Copyright ©2003 Ian H. Giddy The Global Bond Market 17 Benchmark Bonds

18. Copyright ©2003 Ian H. Giddy The Global Bond Market 18 Corporate Bonds: Spread over Benchmark

19. Copyright ©2003 Ian H. Giddy The Global Bond Market 19 Bond Credit Ratings

20. Copyright ©2003 Ian H. Giddy The Global Bond Market 20 Rating Criteria ProfitabilityCapital Structure Business ModelManagement  Quality of earnings  Ebitda margins  Interest coverage indicators  Volatility of earnings  Cost Managemen t  Indebtedness ratios  Distribution of debt maturities  Effects of concentrated ownership on funding capabilities  Barriers to entry  Competitive environment  Market position  Diversificatio n: Clients, Products, Geographic  Management Structure  Strategy and Objectives  Performance Record

21. Copyright ©2003 Ian H. Giddy The Global Bond Market 21 Deal documentation List information requirements Due diligence & Meeting with management Issuer/Banker Requests rating Pool credit analysis Legal analysis Stress testing Credit enhancement negotiation Rating committee Presale report Final report Rating Process Surveillance

22. Copyright ©2003 Ian H. Giddy The Global Bond Market 22 Ratings and Spreads Source: bondsonline.com

23. Copyright ©2003 Ian H. Giddy The Global Bond Market 23 Protection Against Default: Examples l Collateral l Covenants l Subordination of future debt l Dividend restrictions l Sinking funds

24. Copyright ©2003 Ian H. Giddy The Global Bond Market 24 Global Bonds

25. Copyright ©2003 Ian H. Giddy The Global Bond Market 25 Key Dates in the Issuance of a Eurobond

26. Copyright ©2003 Ian H. Giddy The Global Bond Market 26 Issuing a Bond: Key Players in the Issuance of a Eurobond MANAGERS UNDER- WRITERS SELLING GROUP

27. Copyright ©2003 Ian H. Giddy The Global Bond Market 27 Underwriting Economics Instructions: This is an embedded graph. To edit this graph simply double- click anywhere on the graph. When you’re done editing the graph, click outside of the graph to return to PowerPoint. Management Fee: Normally shared equally among managers (may be subject to a praecipium for Global Coordinator or Lead Manager) Selling Concession: Payable as a percentage of allocation (determined by book-runner) Underwriting Fee: Based on underwriting commitment (often less expenses of offering)

28. Copyright ©2003 Ian H. Giddy The Global Bond Market 28 Pricing and Fees The Business n Telecoms n Dot-Coms n Avons (How much volatility?) Debt Equity Fees 0.15% to 1.5% 5% to 7% Pricing T+Spread L+Spread Comparables/Ratios The market Future cash flow valuation The Issuer

29. Copyright ©2003 Ian H. Giddy The Global Bond Market 29 Case Study: Westpac Bond Financing l Why would Westpac issue a US dollar Eurobond? l Why has the bank issued other kinds of bonds? l How would you explain the Eurobond issuance process and costs to an issuer? l What would be involved in getting a rating for the company?

30. Copyright ©2003 Ian H. Giddy The Global Bond Market 30 Westpac Bond Financing Goals 1. Diversification - Currency - Retail and wholesale markets - Debt product types and maturity term - Debt investor types and location 2. Flexibility 3. Reduce cost and volatility 4. Global debt presence and performance

31. Copyright ©2003 Ian H. Giddy The Global Bond Market 31 Westpac Ratings DurationShort termLong TermOutlook Fitch RatingsF-1+AA-Stable Moody's Investors Service P-1Aa3Stable Standard & Poor's A-1+AA-Stable For senior unsecured debt obligations Westpac has been assigned the following credit ratings:

32. Copyright ©2003 Ian H. Giddy The Global Bond Market 32 Westpac Bond Financing l A$350m 10yr callable subordinated notes l A$600m 5.5% 3 yr notes to Japanese investors l USD $500m 5.75% 5yr Eurodollar AA notes l GBP300m GBP Libor+0.10% 5-yr floating rate note l Eur500m Euribor+0.10% 5-yr FRN

33. Copyright ©2003 Ian H. Giddy The Global Bond Market 33

34. Copyright ©2003 Ian H. Giddy The Global Bond Market 34 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