Ch. 8 - International Banking

Q1. What are the benefits of issuing Eurobonds? Investing in Eurobonds?

A eurobond is a bond denominated in a currency not native to the issuer's home country. Eurobonds are commonly issued by governments, corporations, and international organizations. Let's assume Company XYZ is headquartered in the United States. Company XYZ decides to go to Australia to issue bonds denominated in Canadian dollars. This is an example of a eurobond. In many cases, an issuer sells its eurobonds in a number of international markets. Company XYZ might sell its Canadian dollar-denominated bonds in Japan and Canada too.

Q6. Suppose you are a wealth advisor and a client has asked for your recommendation on which of the BRIC countries poses the least risk and most opportunity for investment growth. Briefly compare the perceived risks and benefits of each of the countries and provide support for your selection.

Global IPO financings raised nearly $300 billion in proceeds, with Brazil, Russia, India, and China ("BRIC" countries) accounting for $105 billion (or 35%) of this volume. Three years earlier, in 2004, this same group of countries comprised just 11% of total global IPO proceeds. BRIC's share of the global IPO market temporarily decreased to 22% in 2008, mostly stemming from the ongoing uncertainty and market turmoil caused by the global credit crisis. China would be considered the best country to invest in. China has the largest growth opportunity. There is a bigger opportunity for gains as they are newly developing, but at the same time IPOs will be more volatile for that reason as well.

Q3. How has recent legislation accelerated the development of the Japanese M&A market?

In 2003, a new law passed that permitted non-Japanese companies to use their own stock to acquire Japanese companies that were under Japanese bankruptcy court protection. This was followed by a 2007 law that further extended the ability of foreign companies to use their stock to acquire Japanese companies, as well as other laws that lowered the threshold shareholder approval requirement for an acquisition.

Q5. In a comparable transactions analysis, what additional considerations might an investment banker factor in when valuing an emerging market company?

Revenue opportunities and correspondingly large risks. Incremental risks associated with investment banking business in these countries include currency, political, liquidity, accounting, tax, and volatility risks. Some investment banks have prioritized activities in these countries and have been very successful. Included among the most successful banks are Citigroup, Goldman Sachs, UBS, J.P. Morgan, Morgan Stanley, Deutsche Bank, and Credit Suisse.

Q2. Why are most corporate Eurobond issuers large, multinational corporations?

The eurobond market is generally restricted to large, single issues ($50 million or more), and is limited to large companies, banks or governments. Maturities are usually around 10 years or less. However, there are programs available for MNCs to issue smaller amounts, and for shorter periods. Issuing eurobonds can help an MNC raise foreign-denominated debt in large amounts, for long periods of time, and usually at a fixed interest rate. This profile would be suitable for financing large, long-term, overseas developments - for example, establishing an overseas subsidiary.

Q4. How has the Chinese government's relaxation of its foreign exchange controls helped facilitate growth in the Chinese economy?

Under relaxed regulations, current account renminbi (RMB) became convertible into other currencies. A currency that can be readily bought or sold without government restrictions, in order to purchase another currency. Convertibility is important in international trade, it allows companies to do business across borders with confidence and transparent pricing. Also, a convertible currency is more liquid, which reduces volatility. The most convertible currency is the U.S. dollar. It is the most traded currency in the world, central banks hold the U.S. dollar as their main reserve, and a number of asset classes are denominated in U.S. dollars meaning payment and settlements are made in U.S. dollars. South Korea, Chinese, were deemed convertible. The creation of the Qualified Financial Institutional Investor (QFII) program, which allowed qualifying foreign investors to participate in the Chinese equity market via domestic A-shares and in the Chinese debt market.