FIN330: Chapter 14 Raising Equity and Debt Globally

Level 1 ADR

("over the counter" or pink sheets) is the easiest to satisfy. It facilitates trading in foreign securities that have been acquired by U.S. investors but are not registered with the SEC. It is the least costly approach but might have a minimal impact on liquidity

2 purposes of eurobanks

1. Eurocurrency deposits are an efficient and convenient money market device for holding excess corporate liquidity 2. Eurocurrency market is a major source of short-term bank loans

3 major sources of debt funding on the international markets

1. International Bank Loans 2. International Short- and Medium-Term Note Markets 3. International Bond Markets

3 Benefits of raising capital in the Eurobond market

1. The absence of regulatory interference 2. Less stringent disclosure practices 3. Favorable tax treatment—tax evasion

Syndicated loans

Allows many different investors to "participate" in the funding of the loan, thereby allowing them to diversify their risk or exposure to the individual borrower. The result is the borrower gains access to a greater availability of capital at a lower cost of funds.

Eurobank

A financial intermediary that simultaneously bids for time deposits and makes loans in a foreign currency

Euro-commercial paper (ECP)

A short-term debt obligation of a corporation or bank. Maturities are typically one, three, and six months. Sold normally at a discount or occasionally with a stated coupon. More than 90% of issues outstanding are denominated in U.S. dollars.

Level 2 ADR

Applies to firms that want to list existing shares on the NYSE, AMEX, or NASDAQ markets. They must meet the full registration requirements of the SEC. This means reconciling their financial accounts with those used under U.S. GAAP, which raises the cost considerably

Level 3 ADR

Applies to the sale of a new equity issued in the United States. It too requires full registration with the SEC and an elaborate stock prospectus. This is the most expensive alternative but the most likely to improve the stock's liquidity and escape from home market segmentation.

Sponsored depository receipts

Are created at the request of a foreign firm wanting its shares traded in the United States. The firm applies to the Securities and Exchange Commission (SEC) and a U.S. bank for registration and issuance of ADRs.

Eurocredits

Bank loans to MNEs, sovereign governments, international institutions, and banks. Maturity 3-10 years. Floating interest rate

Euro-medium term notes

Basic characteristics are similar to those of a bond, with principal, maturity, and coupon structures and rates being comparable. Maturities range 9months-10years. 3 major characteristics: 1. allowing continuous issuance over a period, unlike a bond issue, which is essentially sold all at once. 2. coupons are paid on set calendar dates regardless of the date of issuance 3. issued in relatively small denominations, from $2 million to $5 million, making medium-term debt acquisition much more flexible

International bonds

Bonds fall within 2 categories: eurobonds and foreign bonds.

Credit line (Eurocredit)

Borrower has the right to borrow up to a "committed" amount at the prevailing interest rate plus a preset spread during an agreed-upon period Bank charges a commitment fee of the unused portion of the committed amount (0.25% - 0.75% of unused portion of credit)

American depositary receipts ADRs

Certificates traded in the United States and denominated in U.S. dollars. ADRs are sold, registered, and transferred in the United States in the same manner as any share of stock, with each ADR representing some multiple of the underlying foreign share... *quoted only in U.S. dollars and are traded only in the United States.*

Global Registered Share GRS

Ordinary shares that trade on multiple global stock exchanges in different currencies. These shares can be traded in and transferred across borders.

Eurocurrency

Domestic currencies of one country on deposit in another country. They have fixed maturity and there is a penalty for early withdrawal... Ex. Eurodollar is a US dollar denominated deposit in a bank outside the US.

Why do two types of international bonds exist?

Firm can issue bonds in multiple foreign markets, sometimes simultaneously with distribution in the domestic market

Term loan (Eurocredit)

Fixed maturity Fixed amount Only regular expense is interest

Unsponsored depositary receipts

If a foreign firm does not seek to have its shares traded in the United States but U.S. investors are interested, a U.S. securities firm may initiate creation of the ADRs.

How does borrowing in a foreign currency change the risk associated with debt?

Increases risk because you can only guess at future foreign exchange risk... Decreases risk by diversifying.

Global Bonds

Issued and traded in the foreign bond market of one or more countries as well as in the Eurobond market

Depository receipt

Negotiable certificates issued by a bank to represent the underlying shares of stock

International debt market

Offers the borrower a wide variety of different maturities, repayment patterns, currencies of denomination, and types of subordination or linkage to other debt and equity instruments

Euronotes

Short-term, negotiable, promissory notes. Cheap source of short-term funds because the notes are placed directly with the investor public

London Interbank Offer Rate (LIBOR)

The rate at which banks in the City of London offer Eurocurrency in the placement market. Viewed as the most important benchmark in the world for short-term interest rates

Why borrow in a Eurocurrency from a Eurobank?

To benefit from narrower interest rate spreads because Eurobanking activities are outside the control of any central bank

Eurobond

Underwritten by an international syndicate of banks and other securities firms and is *sold exclusively in countries other than the country in whose currency the issue is denominated.* For example, a bond issued by a firm resident in the United States, denominated in U.S. dollars but sold to investors in Europe and Japan

Foreign bond

underwritten by a syndicate composed of members from a single country, sold principally within that country, and denominated in the currency of that country. The issuer, however, is from another country. A bond issued by a firm resident in Sweden, denominated in dollars, and sold in the United States to U.S. investors by U.S. investment bankers, would be a foreign bond... They have nicknames. Foreign bonds sold in the United States are "Yankee bonds"; foreign bonds sold in the United Kingdom are "bulldogs."