Tài chính doanh nghiệp - Chapter 11: International debt

Chapter 11International DebtCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonLearning ObjectivesExamine the use of international debt markets as a source of fundingFocus on the role of euromarkets and US capital marketsDistinguish between eurocurrency, euronote and eurobond marketsConsider US debt markets and securitiesExplain the role of credit rating agenciesCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation11.1 Introduction11.2 The Euromarkets11.3 Eurocurrency Market11.4 Euronote Market11.5 Eurobond Market11.6 Markets in the USA11.7 Credit Rating Agencies11.8 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.1 IntroductionWho uses international debt markets?Financial institutions are the largest borrowersAlso used by governments and corporationsInvestors are attracted to international debt markets as theyProvide a deep and liquid marketAllow higher investment returnsAre a form of portfolio diversificationCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.1 Introduction (cont.)Deregulation of FX markets have contributed to the importance of international debt marketsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation11.1 Introduction11.2 The Euromarkets11.3 Eurocurrency Market11.4 Euronote Market11.5 Eurobond Market11.6 Markets in the USA11.7 Credit Rating Agencies11.8 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.2 The EuromarketsConsist of large unregulated money and capital marketsMajor centres in London, the Middle East and AsiaEuromarket transactions are mainly denominated in a currency other than the currency of the country that issued the debtUSD is the dominant currencyCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation11.1 Introduction11.2 The Euromarkets11.3 Eurocurrency Market11.4 Euronote Market11.5 Eurobond Market11.6 Markets in the USA11.7 Credit Rating Agencies11.8 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.3 Eurocurrency MarketThe major forms of eurocurrency facility discussed areShort-term bank balancesStand-by arrangementsMedium- to longer-term eurocurrency loansCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.3 Eurocurrency Market (cont.)Short-term bank advancesSimilar to ‘fully-drawn advances’Term determined, and full amount drawn-down on approvalCommitment fee may be charged if not drawn-down immediately after approvalCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.3 Eurocurrency Market (cont.)Short-term bank advances (cont.)May be extended by ‘revolving credit’ where a mixture of currencies can be chosen at each roll-over (i.e. to match borrower’s expected currency inflows)LIBOR typically used as indicator or reference rateCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.3 Eurocurrency Market (cont.)Eurocurrency stand-by facilitiesA source of ‘back-up’ funds to meet short-term cash shortfallsFunds more likely to be available offshore in periods of tight domestic liquidityShort-term finance (up to two years)Interest charge and commitment fee applyCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.3 Eurocurrency Market (cont.)Medium- to long-term eurocurrency bank loansMinimum loan size $3 to $5 millionLarger loans (above $100 million) may involve a syndicate of banksTerm is typically 5 to 10 yearsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.3 Eurocurrency Market (cont.)Medium- to long-term eurocurrency bank loans (cont.)Loans are usually fully drawn-down at commencement of loanInterest rate normally above LIBOR and fixed for a period of < 12 monthsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.3 Eurocurrency Market (cont.)Novation, subparticipation and transferable loan certificatesThese are forms of quasi-securitisationMost loans contain a form of sell-down provision i.e. a clause in a loan contract that enables a lender to sell the debt security to another partyCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.3 Eurocurrency Market (cont.)Most loans contain a form of sell-down provision i.e. a clause in a loan contract that enables a lender to sell the debt security to another party (cont.)NovationThe original lender is able to transfer to a third party all rights and obligations due under the original loan agreementCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.3 Eurocurrency Market (cont.)Most loans contain a form of sell-down provision i.e. a clause in a loan contract that enables a lender to sell the debt security to another party (cont.)SubparticipationA lender retains a loan but, for a price, transfers its rights to receive interest and principal repaymentsTransferable loan certificates (TLC)Allows a lender to convert a loan into transferable certificates that have the same terms as the original loanCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.3 Eurocurrency Market (cont.)Reasons for borrowing in eurocurrency marketsLower cost of borrowingForeign interest rates are often lower than on-shore ratesBorrowing off-shore involves exchange rate riski.e. for a borrower the local currency may depreciate against the currency in which the loan is denominated; therefore, requiring more foreign funds to be repaidCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.3 Eurocurrency Market (cont.)Reasons for borrowing in eurocurrency markets (cont.)Lower cost of borrowing (cont.)Exchange rate risk can be hedged e.g.180 day funds are available in Australia at 9% p.a. and the cost of a 180 day eurodollar is 6% p.a.Therefore cost of covering exchange rate risk would be 3%Covered cost of eurodollar funds is 9% (i.e. 6% + 3%)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.3 Eurocurrency Market (cont.)Reasons for borrowing in eurocurrency markets (cont.)A natural hedge can be created e.g.Exporter has a USD receivable in 180 daysIf AUD appreciates, then receivable falls in valueSuppose exporter borrows a similar amount overseasCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.3 Eurocurrency Market (cont.)Reasons for borrowing in eurocurrency markets (cont.)A natural hedge can be created e.g. (cont.)Now, if the AUD appreciates, the exporter makes a foreign exchange gain on the loan, offsetting the loss from the USD receivableCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.3 Eurocurrency Market (cont.)Reasons for borrowing in eurocurrency markets (cont.)The sheer size of eurocurrency marketsLarge number of potential lendersAble to borrow large amounts relatively easilyCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.3 Eurocurrency Market (cont.)Reasons for borrowing in eurocurrency markets (cont.)To develop a profile in eurocurrency marketsThis profile may open up longer-term funding options for the firmEstablishes the borrower’s nameCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation11.1 Introduction11.2 The Euromarkets11.3 Eurocurrency Market11.4 Euronote Market11.5 Eurobond Market11.6 Markets in the USA11.7 Credit Rating Agencies11.8 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.4 Euronote MarketMarket for short-term promissory notes (P-notes)Intermediary may purchase and hold the notes or they may be sold into the marketLenders may be prepared to lend larger amounts and for longer terms than for a straight loanCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.4 Euronote Market (cont.)Three basic types of euronotesEuronote issuance facility (NIF)Eurocommercial paper (ECP)Medium-term notes (MTN)As discount securities, the price of the NIF and an ECP can be calculated using the equations in Chapter 9Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.4 Euronote Market (cont.)Euronote issuance facility (NIF)A short-term unconditional bearer promissory note drawn by the borrower in the borrower’s nameUnderwriting banks guarantee funds at issue, and convert funding into medium-term through a roll-over facilityMaturity usually 30 to 180 daysDenominated in US$100,000 to US$500,000 equivalentsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.4 Euronote Market (cont.)Eurocommercial paper (ECP)Similar to NIF, but funds not underwrittenStand-by facility used to replace underwriterUsually less than six dealing institutions (spread geographically and involving different institutional forms)Credit rating needs to be obtainedCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.4 Euronote Market (cont.)Euro medium-term note (MTN)Maturity between 9 months and 15 yearsTakes the form of bearer securities with annual couponsCoupon either fixed or variable, at a margin above a nominated indicator rateCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.4 Euronote Market (cont.)Euro medium-term note (MTN) (cont.)MTNs vary in terms of maturities, currency, and coupon ratesMTNs are typically issued in USD denominated in USD5,000–10,000 (for retail investors) to USD100,000–1 million (for institutional investors)Size of facility USD100 million–1 billionCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation11.1 Introduction11.2 The Euromarkets11.3 Eurocurrency Market11.4 Euronote Market11.5 Eurobond Market11.6 Markets in the USA11.7 Credit Rating Agencies11.8 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.5 Eurobond MarketDomestic bondsBond issue into a local market, in the local currency, by a local companyForeign bondsBond issue into a foreign market, in the local currency of that marketEurobondsBond issue in a currency other than the currency of the market in which it is issuedCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.5 Eurobond Market (cont.)Eurobonds (cont.)Underwritten by a multinational syndicate of banksNot marketed on a single specific national bond market and, thus, not subject to listing and trading regulations imposed on domestic and foreign bond issuesE.g. an Australian company issuing USD denominated bonds into Hong KongCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.5 Eurobond Market (cont.)Development of the eurobond marketInvestors prefer the anonymity of bearer bonds, as compared to the registered bonds of the USAInvestors may fear changes in regulation of foreign bond issues in the USAEuromarkets are the most efficient, least costly, most flexible and innovative bond marketsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.5 Eurobond Market (cont.)Issue and trading of eurobondsEurobonds are sold in a multi-stage process organised by an international bank called the lead managerLead manager creates a management group by inviting between 5 and 30 banks to be co-managersBetween 30 and 300 underwriters are involvedCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.5 Eurobond Market (cont.)Issue and trading of eurobonds (cont.)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.5 Eurobond Market (cont.)Three main types of eurobondsStraight (fixed coupon)Floating rate notesConvertible bonds and warrantsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.5 Eurobond Market (cont.)Straight (fixed coupon)A fixed interest bond paying annual coupons, principal repayable at maturitySold directly to public (retail), requiring issuer to have highest credit ratingIssue amount USD50–500 million, usually USDCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.5 Eurobond Market (cont.)Floating rate notes (FRNs)A bearer bond with a variable coupon rate based on an indicator interest rateCoupon rate reset periodically, usually six monthlyIssue amount typically USD100 millionFRNs often have a call option and a put optionFurther innovation includes perpetual issues without a dateCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.5 Eurobond Market (cont.)Convertible bonds and warrantsConvertible bondsHolder has the option to convert bond into another form, such as equity or other debt instrument of the issuerExtinguishes the original bondCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.5 Eurobond Market (cont.)Convertible bonds and warrants (cont.)WarrantsHolder has the right to purchase other specified securities of the issuerOriginal bond is not extinguished, but exists until redemption at maturityCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.5 Eurobond Market (cont.)Calculating the price of fixed-interest euromarket securitiesFormula is the same as fixed-interest security formula in Chapter 10(11.2)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation11.1 Introduction11.2 The Euromarkets11.3 Eurocurrency Market11.4 Euronote Market11.5 Eurobond Market11.6 Markets in the USA11.7 Credit Rating Agencies11.8 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.6 Markets in the USAImportant US securities available areCommercial paper (USCP)Medium-term notesUS foreign (Yankee) bondsAmerican depository receipts (ADRs)The US market is highly innovative and has other products not discussed hereCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.6 Markets in the USA (cont.)Commercial paper (USCP)Short-term promissory noteAverage maturity 20 to 45 daysDenomination in US$100,000Some issues are supported by credit enhancements like a bank letter of credit, or security over the assets of the issuerCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.6 Markets in the USA (cont.)Medium-term notes (MTNs)An unsecured debt instrument paying a specified coupon, issued in tranchesRange of maturities, but generally longer termHighly flexibleIssuer able to issue MTNs on a regular basis once registered with the regulatory body (SEC)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.6 Markets in the USA (cont.)US foreign (Yankee) bondsA debt security issued by a foreign borrower into the US marketDenominated in USDIssued for up to 20 yearsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.6 Markets in the USA (cont.)US foreign (Yankee) bonds (cont.)Credit rating obtained for each issueStraight bond—pays equal periodic interest coupons; principal repaid at maturityJunk bond—issue of securities with a credit rating of less than BBBCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.6 Markets in the USA (cont.)American depository receipts (ADRs)A security issued by a US depository bank and evidenced by a depository shareThe depository share represents one or more ordinary shares of a foreign issuer listed on the foreign company’s home stock exchangeCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.6 Markets in the USA (cont.)American depository receipts (ADRs) (cont.)Allows foreign companies to raise capital in US market without needing to meet SEC listing requirementsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation11.1 Introduction11.2 The Euromarkets11.3 Eurocurrency Market11.4 Euronote Market11.5 Eurobond Market11.6 Markets in the USA11.7 Credit Rating Agencies11.8 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.7 Credit Rating AgenciesAn organisation specialising in assessing the credit quality associated with financial obligations e.g. S&P (Standard and Poor’s)S&P provideLong-term credit ratings (AAA to C), with BBB and above being ‘investment grade’Short-term credit ratings (A-1 to D)A rating of a corporation overallIssue-specific credit ratings on the credit worthiness of an obligor with respect to a specific financial obligationCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.7 Credit Rating Agencies (cont.)An organisation specialising in assessing the credit quality associated with financial obligations e.g. S&P (Standard and Poor’s) (cont.)Credit ratings of specific issues into international markets includeCountry risk—risk that changes in the laws of a foreign currency affect financial transactionsSovereign risk—risk that a foreign government will default on its obligationsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.7 Credit Rating Agencies (cont.)An organisation specialising in assessing the credit quality associated with financial obligations e.g. S&P (Standard and Poor’s) (cont.)Credit ratings of specific issues into international markets include (cont.)Foreign exchange risk—risk that the value of one currency, relative to another, will changeCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.7 Credit Rating Agencies (cont.)An organisation specialising in assessing the credit quality associated with financial obligations e.g. S&P (Standard and Poor’s) (cont.)The rating methodology develops a profile balancing business risk and financial risk factorsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation11.1 Introduction11.2 The Euromarkets11.3 Eurocurrency Market11.4 Euronote Market11.5 Eurobond Market11.6 Markets in the USA11.7 Credit Rating Agencies11.8 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.8 SummaryInternational debt markets are attractive to both investors and borrowersMajor eurocurrency facilities include short-term banks balances, stand-by arrangements and medium- to longer-term eurocurrency loans, and are attractive forThe lower cost of borrowingCreating a natural hedgeThe size of the eurocurrency marketThe euronote market is a market for short-term P-notes and it includes NIF, ECP and MTNCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson11.8 Summary (cont.)The eurobond market is a market for the issue of bonds in a currency other than the currency of the market of issue and it includes straight (fixed coupon), floating rate notes and convertible bonds and warrantsDebt markets in the USA include commercial paper (USCP), medium-term notes, US foreign (Yankee) bonds and American depository receipt (ADRs)Credit rating agencies assess the credit quality of a firm and/or its financial obligationsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson