Tài chính kế toán - Chapter 11: International debt markets

Chapter 11International debt marketsLearning objectivesExamine the use of international debt markets as a source of fundingDescribe the role of euromarkets and US capital marketsDistinguish between eurocurrency, euronote and eurobond marketsConsider US debt markets and securitiesExplain the role of credit rating agencies11.1 The euromarkets11.2 Eurocurrency market11.3 Euronote market11.4 Eurobond market11.5 Markets in the USA11.6 Credit rating agencies11.7 SummaryChapter organisation11.1 The euromarketsInternational debt marketsAre used by: financial institutions, who are the largest borrowersgovernments and corporationsAttract investors as they:provide a deep and liquid marketallow higher investment returnsare a form of portfolio diversificationHave grown in importance owing to deregulation of FX marketsAccessible to borrowers with a strong financial reputation and a very good credit rating(cont.)11.1 The euromarkets (cont.)International debt markets (cont.)Consist of large unregulated money and capital marketsMajor centres in London, the Middle East and AsiaUSD is the dominant currencyEuro-zone is the domestic market for countries adopting the euro currencyDebt securities denominated in euros have grown as the predictability, liquidity and volatility of the euro consolidate(cont.)11.1 The euromarkets (cont.)EuromarketsInitially evolved to enable countries to hold USD outside of the US, e.g. USSRAlthough euromarkets originated in Europe, euromarket transactions can occur in any nation-state of the world‘Euro’ means ‘outside’A euromarket transaction is conducted in a foreign country but not in its currencyGrowth in euromarket transactions is driven mainly by interest rate factors; i.e. lower borrowing and higher lending rates(cont.)11.1 The euromarkets (cont.)Euromarkets (cont.)Provide intermediated and direct finance over a range of terms to maturity and are categorised as follows:Eurocurrency marketsProvide intermediated bank financeEuronote marketsProvide short-term direct financeEurobond marketsProvide medium- to long-term direct financeChapter organisation11.1 The euromarkets11.2 Eurocurrency Market11.3 Euronote market11.4 Eurobond market11.5 Markets in the USA11.6 Credit rating agencies11.7 Summary11.2 Eurocurrency marketThe major forms of eurocurrency facilities discussed are:short-term bank advancesstandby arrangementsmedium- to long-term eurocurrency loans(cont.)11.2 Eurocurrency market (cont.)Short-term bank advancesSimilar to term loans or fully drawn advancesTerm determined and full amount drawn down on approvalCommitment fee may be charged if advance not drawn down immediately after approvalMay be extended by ‘revolving credit’, where a mixture of currencies can be chosen at each rollover (to match borrower’s currency inflows)LIBOR typically used as indicator or reference rate(cont.)11.2 Eurocurrency market (cont.)Eurocurrency standby 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 apply(cont.)11.2 Eurocurrency market (cont.)Medium- to long-term eurocurrency bank loansLoan size about USD3–100 millionLarger loans may involve a syndicate of banksTerm is typically five to 10 yearsLoans usually fully drawn down at commencement of loan unless an availability period is arranged, which attracts a commitment feeInterest rate normally above LIBOR and fixed for a period of one to 12 months, plus other fees applyChapter organisation11.1 The euromarkets11.2 Eurocurrency Market11.3 Euronote market11.4 Eurobond market11.5 Markets in the USA11.6 Credit rating agencies11.7 Summary11.3 Euronote marketActive market for short-term promissory notes or commercial paperEuronotes take several forms, two of which are:1. euronote issuance facility (NIF)2. eurocommercial paper (ECP)Demystified in that these securities are fundamentally the same as domestic money-market and capital-market securities(cont.)11.3 Euronote market (cont.)Euronote issuance facility (NIF)A short-term unconditional bearer promissory note drawn by the borrower in borrower’s nameUnderwriting banks guarantee funds at issue and convert funding into medium term through a rollover facilityThe instrumentDiscount securityMaturity usually 30 to 180 daysBearer securities in denominations of USD 100 000 to 500 000(cont.)11.3 Euronote market (cont.)Euronote issuance facility (NIF) (cont.)StructureA syndicate of banks underwrite the facility to a specified amount and discount rate, thus providing certainty for borrowerSelling proceduresUsually sold by a tender process, inviting members of a tender panel to tender prices for the notesTender panel composed of up to 25 financial institutions, including some of the underwritersIssuer may specify a rate (posted rate), which is the yield at which the issuer is willing to sell a security(cont.)11.3 Euronote market (cont.)Euronote issuance facility (NIF) (cont.)Parties involved in NIF issueArranger, lead manger, co-managers and senior managers, facility agent, tender panel agent, issuing and paying agentFeesAdditional to NIF issue and rollover fees: include establishment fees for the arranger, managers and underwriter; commitment fee and take-up fees to underwriters; and agency fees for administrationApproximately 50 basis points (0.50%) in equivalent annual costs(cont.)11.3 Euronote market (cont.)Eurocommercial paper (ECP)Arrangement where P-notes are issued into euromarkets that are not underwrittenDeveloped owing to changes in needs of:borrowers—high credit ratings and a history of successful issues, sought cheaper funds by dispensing with underwritersfinancial institutions—underwriting NIF issues sought to avoid imposed capital adequacy requirements of off-balance-sheet exposures(cont.)11.3 Euronote market (cont.)Eurocommercial paper (ECP) (cont.)Typically more than USD250 millionIssued in tranches to test market’s reaction and to match borrower’s cash needsUsually less than six dealing institutions (spread geographically and involving different institutional forms) to avoid fragmentation of facility(cont.)11.3 Euronote market (cont.)Calculating the price of NIF and ECPDiscount security formulae (from Chapter 9) but with market convention of a 360-day year Chapter organisation11.1 The euromarkets11.2 Eurocurrency Market11.3 Euronote market11.4 Eurobond market11.5 Markets in the USA11.6 Credit rating agencies11.7 Summary11.4 Eurobond marketEurobond market is the equivalent of a domestic capital marketTwo main long-term coupon debt securities issued in the euromarket considered here:1. Euro medium-term notes2. Eurobonds, including straight bonds and floating rate notes(cont.)11.4 Eurobond market (cont.)1. Euro medium-term notes (MTN)Emerged from the US equivalent marketUnsecured, non-homogenous bearer securities paying periodic coupon, issued in tranchesMaturities up to 15 years, average about three yearsCoupons can be a fixed or variable interest rate expressed as a margin above a specified indicator rateMTNs are not homogenous and can include a range of maturities, currencies and fixed and floating couponsDealersWith issuers, determine amount of facility and maturitiesAct as agents for the issuer and seek investorsPromote secondary market by quoting two-way prices(cont.)11.4 Eurobond market (cont.)Euro medium-term notes (MTN) (cont.)IssuesPrimary issue on a periodic or continuous (daily) basisTo remove concerns of fragmentation of notes, two other distribution techniques used1. MTN tap approach—involves dividing facility into a number of tranches, each with a specified minimum and maximum dollar amount, and identical maturity and coupon2. Serial offering technique—involves setting the maturity and coupon terms when facility is established. Facility may have several series of notes, each with different characteristics(cont.)11.4 Eurobond market (cont.)2. EurobondsBond markets consist of three broad market groups i Domestic bondsBonds issued into a local market, in the local currency, by a local companyii Foreign bondsBonds issued into a foreign market, in the local currency of that marketiii EurobondsBonds issued into a foreign market, but not in the currency of that marketTraded on global markets and may escape local market listing and trading regulationsUnderwritten by a multinational syndicate of banks(cont.)11.4 Eurobond market (cont.)Issue and trading of eurobondsEurobonds are sold in a multistage process organised by an international bank called the lead managerLead manager creates a management group by inviting five to 30 banks to be co-managersManagement group prepares the bond issue, sets final conditions of the bond, selects underwriters and usually subscribes to a large portion of the issue30 to 300 underwriters are invited to participate based on their regional placement power(cont.)11.4 Eurobond market (cont.)Issue and trading of eurobonds (cont.)11.4 Eurobond market (cont.)Types of eurobondsEurobond markets continue to develop with new types of instruments and issuing techniques arising from time to timeTwo classes of bonds considered here:1. Straight (fixed coupon)2. Floating rate notes(cont.)11.4 Eurobond market (cont.)Types of eurobonds (cont.)1. Straight (fixed coupon)A fixed-interest bond paying periodic coupons; principal repayable at maturityIssuers and investorsIssuers—high credit rating and a household nameInvestors include retail and institutional investorsAmount and currency of denominationFixed costs of issue constrain minimum size of issue to at least USD50 million, average about USD500 millionMain currency USD, but also yen, euro and pound sterling(cont.)11.4 Eurobond market (cont.)Types of eurobonds (cont.)Interest rate (coupon)Fixed coupon set at issue generally paid annually in arrearsCoupons detached from bonds and presented to issuer’s paying agent for payment on due dateMaturityUsually a specified maturity date (mostly three to 12 years), with no option for issuer or investor to lengthen or shorten life of bondUsually principal payable in full on maturity (bullet repayment, although a partly amortised repayment structure possible)(cont.)11.4 Eurobond market (cont.)Types of eurobonds (cont.)ListingEurobond market has no specific physical locationSecondary market dealings occur through market-makers in a number of world financial centresEurobonds may be listed on the Luxembourg, London or Singapore exchanges, in compliance with disclosure standards and to ensure periodic public quotation, but few if any transactionsParticipantsIn addition to lead and co-mangers, and underwriting and selling groups, trustee and paying agents are involvedCostsCommission of 1.5% to 2.5% of issue price and direct costs(cont.)11.4 Eurobond market (cont.)Types of eurobonds (cont.)2. Floating rate notes (FRNs)A bearer bond with a variable coupon rate based on an indicator interest rate, generally LIBORCoupon rate reset periodically (usually six monthly) and therefore the price remains relatively stableIssue amount typically USD100 million, but can be more than USD500 millionMaturities ranging from five to 20 yearsFRNs often have a call option, and may also have a put option(cont.)11.4 Eurobond market (cont.)Calculating the price of fixed-interest euromarket securitiesFormula is the same as fixed-interest security formula 10.7 in Chapter 10Chapter organisation11.1 The euromarkets11.2 Eurocurrency Market11.3 Euronote market11.4 Eurobond market11.5 Markets in the USA11.6 Credit rating agencies11.7 Summary11.5 Markets in the USAUS markets accessible to more international borrowers than euromarkets because of the lower required investment grade credit rating, i.e. BBB and AA respectivelyImportant available US securitiesCommercial paper (USCP)US foreign (Yankee) bondsAmerican depository receipts (ADRs)The US market is highly innovative and has other products not discussed here(cont.)11.5 Markets in the USA (cont.)Commercial paper (USCP)Short-term promissory note; i.e. discount securityAverage maturity less than 45 daysDenominations of USD$100 000Some issues are supported by credit enhancements such as a bank letter of credit, or security over the assets of the issuerIssue by public offer or private placement without requirement for official SEC registration(cont.)11.5 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 yearsStraight bond—fixed interest periodic coupon, principal repayable at maturityYankee bond—a variation issued as a floating rate note with interest coupons based on an indicator rateJunk bond—issue of securities with a credit rating less than investment-grade BBB(cont.)11.5 Markets in the USA (cont.)American depository receipts (ADRs)A security issued by a US depository bank and supported by a depository shareThe depository share represents one or more ordinary shares of a foreign issuer listed on the foreign company’s home stock exchangeAllows foreign companies to raise capital in US market without needing to meet SEC listing requirementsChapter organisation11.1 The euromarkets11.2 Eurocurrency Market11.3 Euronote market11.4 Eurobond market11.5 Markets in the USA11.6 Credit rating agencies11.7 SummaryCopyright  2009 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Institutions, Instruments and Markets 6e by VineySlides prepared by Anthony Stanger11-3911.6 Credit rating agenciesAn organisation specialising in assessing the credit quality associated with financial obligations, e.g. S&P (Standard & Poor’s)The rating methodology develops a profile balancing business risk, financial risk and environmental risk factorsS&P provide:long-term credit ratings (AAA to D), with BBB and above being ‘investment grade’short-term credit ratings (A-1 to D)a rating of a corporation overall(cont.)11.6 Credit rating agencies (cont.)S&P provide (cont.):issue-specific credit ratings on the creditworthiness of an obligor with respect to a specific financial obligationcredit ratings of specific issues into international markets include the following:Country risk—risk of changes in the laws of a foreign country affecting financial transactionsSovereign risk—risk of a foreign government defaulting on its obligationsForeign exchange risk— risk of the value of one currency, relative to another, changing(cont.)11.6 Credit rating agencies (cont.)Credit ratings agencies have been accorded a lot of attention over the past several yearsFirst, credit ratings agencies were criticised heavily for providing favourable ratings on securitised mortgage products that later turned ‘toxicSecond, as the GFC became a sovereign debt crisis, the ratings accorded to different countries (especially Greece, Spain and Italy) attracted much interestCommentators and investors have been most interested in much-publicised ratings ‘downgrades’ of various countriesChapter organisation11.1 The euromarkets11.2 Eurocurrency Market11.3 Euronote market11.4 Eurobond market11.5 Markets in the USA11.6 Credit rating agencies11.7 Summary11.7 SummaryInternational debt markets are attractive to both investors and borrowersMajor eurocurrency facilities include short-term bank advances, standby facilities and medium- to long-term bank loans, and are attractive because of:the lower cost of borrowingtheir creating a natural hedgethe size of the eurocurrency marketThe euronote market is a market for short-term direct debt markets(cont.)11.7 Summary (cont.)Main security is the P-note (commercial paper) with two main facilities, NIF and ECPThe 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 MTNs, straight (fixed coupon) bonds and floating rate notesDebt markets in the US include commercial paper (USCP), US foreign (Yankee) bonds and American depository receipts (ADRs)Credit rating agencies assess the credit quality of a firm and/or its financial obligations