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Foundations of Multinational Financial

Management

BABASAB PATIL

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International Financing and International Financial Markets

Chapter 12

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I. CORPORATE SOURCES AND USES OF FUNDS

I. CORPORATE SOURCES AND USES OF FUNDSA. 3 General Sources of Funds:

1. Internally-generated cash2. Short-term external funds3. Long-term external funds

B. Forms of Securities1. Equity2. Debt: the most preferred form

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CORPORATE SOURCES AND USES OF FUNDS

C. Debt Instruments Used1. Commercial Bank Loans2. Bonds

a. Publicly issuedb. Privately issued

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CORPORATE SOURCES AND USES OF FUNDS

D. Financial Markets v. Financial Intermediaries

1. Securitizationa. Definition:

replacing bank loans withsecurities issued in public markets.

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CORPORATE SOURCES AND USES OF FUNDS

b. Reflects reduction in access costsdue to1.) Technological

improvements2.) Globalization

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CORPORATE SOURCES AND USES OF FUNDS

E . Corporate Governancedifferences exist and fall into two general categories:

1. Anglo-Saxon (AS) Model

2. Continental European and Japanese (CEJ) Model

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CORPORATE SOURCES AND USES OF FUNDS

F. Globalization of Financial Markets-has led to

1. Global center competition2. Regulatory arbitrage

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II.NATIONAL CAPITAL MARKET AS

INTERNATIONAL CENTERSA.Principal Functions of Financial Centers

-between savers and borrowers1. To transfer purchasing power2. To allocate funds

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NATIONAL CAPITAL MARKET ASINTERNATIONAL CENTERS

B. International Financial Market1. Development of most important:

a. Londonb. New Yorkc. Tokyo

2. Other Centers for Intermediariesa. Singaporeb. Hong Kongc. the Bahamas

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NATIONAL CAPITAL MARKET ASINTERNATIONAL CENTERS

3. Prerequisites to be a financial center

a. political stabilityb. minimal government interventionsc. legal infrastructured. financial infrastructure

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NATIONAL CAPITAL MARKET ASINTERNATIONAL CENTERS

C.Foreign Access to Domestic Markets1. The Foreign Bond Market

a. Extension of domestic marketb. Issues floated by foreign cos. or

governmentsc. Examples:

yankee bonds, samurai bonds

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NATIONAL CAPITAL MARKET ASINTERNATIONAL CENTERS

c. Three Major Types of Foreign Bonds1.) Fixed rate2.) Floating rate3.) Equity related

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NATIONAL CAPITAL MARKET ASINTERNATIONAL CENTERS

2. The Foreign Bank Marketa. Extension of domestic marketsb. Important funding source:

Japanese banks for U.S. firms3. The Foreign Equity Market

a. Cross listing internationally can1.) diversify risk2.) increase potential demand3.) build base of global owners.

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III. THE EUROMARKETS

D. Downside of Global Financial Markets-abrupt shifts in capital flows

II. THE EUROMARKETS-the most important international

financial markets today.A. The Eurocurrency Market

1. Composed of eurobanks who accept/ maintain deposits of foreign currency2. Dominant currency: US$

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THE EUROMARKETS

B. Growth of Eurodollar Marketcaused by restrictive US governmentpolicies, especially

1. Reserve requirements on deposits2. Special charges and taxes3. Required concessionary loan rates4. Interest rate ceilings5. Rules which restrict bank competition.

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THE EUROMARKETS

C.Eurodollar Creation involves1. A chain of deposits2. Changing control/usage of deposit3. Eurocurrency loans

a. Use London Interbank Offer Rate: LIBOR as basic rate

b. Six month rolloversc. Risk indicator: size of

margin between cost and rate charged.

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THE EUROMARKETS

4. Multi-currency Clausesa. Clause gives borrowers option

to switch currency of loan at

rollover.b. Reduces exchange rate risk

5. Domestic vs. Eurocurrency Marketsa. Closely linked rates by arbitrageb. Euro rates: tend to lower

lending, higher deposit

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THE EUROMARKETS

D. Eurobondsbonds sold outside the country of

currency denomination.1. Recent Substantial Market Growth -due to use of swaps.

a financial instrument which gives 2 parties the right to exchange streams of income over time.

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THE EUROMARKETS

2. Links to Domestic Bond Markets

arbitrage has eliminated interest rate differential.

3. Placementunderwritten by syndicates of

banks

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THE EUROMARKETS

4. Currency Denominationa. Most often US$b. “Cocktails” allow a basket of

currencies5. Eurobond Secondary Market -result of rising investor demand6. Retirement

a. sinking fund usuallyb. some carry call provisions.

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THE EUROMARKETS

7. Ratingsa. According to relative riskb. Rating Agencies Moody’s, Standard & Poor

8. Rationale For Market Existencea. Eurobonds avoid government

regulationb. May fade as market deregulate

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THE EUROMARKETS

E. Eurobond vs. Eurocurrency Loans1. Five Differences

a. Eurocurrency loans use variable rates

b. Loans have shorter maturitiesc. Bonds have greater volumed. Loans have greater flexibilitye. Loans obtained faster

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THE EUROMARKETS

F. Note Issuance Facility (NIF)1. Low-cost substitute for loan2. Allows borrowers to issue own notes3. Placed/distributed by banks

G. NIFs vs. Eurobonds1. Differences:

a. Notes draw down credit as neededb. Notes let owners determine timingc. Notes must be held to maturity

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THE EUROMARKETS

5. Euronotes and Euro-Commercial Papera. Euronotes

unsecured short-term debt securities denominated in US$ and

issued by corporations and governments.b. Euro-commercial paper(CP)

euronotes not bank underwritten

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THE EUROMARKETS

c. U.S. vs. Euro-CPs1.) Average maturity longer (2x)

for Euro-CPs2.) Secondary market for Euro;

not U.S. CPs.3.) Smaller fraction of Euro use

credit rating services to rate.

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V. DEVELOPMENT BANKS

A. General Purposefounded by governments to help

financevery large infrastructure

projects.

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DEVELOPMENT BANKS

B. Types of Development Banks1. World Bank Group includes

a. International Bank for Reconstruction and

Developmentb. International Development

Associationc. International Finance

Corporation

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DEVELOPMENT BANKS

B. Types of Development Banks (con’t)

2. Regional Development Banksfinance industry, agricultural,

and infrastructure projects3. National Development Banks

concentrate on a particular industry or region.