INTRO TO CORPORATE FINANCE AND INVESTMENTS

TOPIC: INTERNATIONAL DEBT MARKETS

Professor
M. Max Croce,
SDA Professor

SDA Bocconi Asia Center I Capital Markets

 Outline
 Debt Financing overview

 All-In-Cost (AIC) principle

 Minimizing the cost of debt

 Monetary policy and market outlook (if we have time)

SDA Bocconi Asia Center I Capital Markets

 Overview

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 Sources of Long-Term Capital

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 Characteristics of Debt Financing
Characteristics:
 Maturity
 Spread repayments over time; try to match duration of investments

 Fixed / Floating rates

 When do you go with a floating?
 Expectations matter

 International character:
 domestic vs. international placement
 Currency of denomination

SDA Bocconi Asia Center I Capital Markets

 Debt Denomination: De/Centralized
Should we care if the UIP holds?

What are the benefits of decentralizing?

 Lower costs
 Diversification across currencies

SDA Bocconi Asia Center I Capital Markets

 The Characteristics of Debt Instruments

The international character of debt

Domestic bonds
Bonds that are issued and traded in domestic market (country is country of currency denomination)
International bonds
Bonds traded outside the country of the issuer
 Foreign Bonds – issued in domestic market by a foreign borrower (Ex. Indian company issuing $ bond in
the USA)
 Denominated in the currency of the targeted country [WHY?]
 Marketed to domestic residents
 Regulated by domestic authorities
 Eurobond – mature in less than 10 yrs (usually 5)
 Denominated in one or more currencies
 Traded in external markets outside the borders of the countries issuing the currencies

SDA Bocconi Asia Center I Capital Markets

 Bond Markets are HUGE!

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 International Bonds: Players and Tastes

SDA Bocconi Asia Center I Capital Markets

 Cost of Debt

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 All-in-Cost Principle
The Cost of a loan has 3 components:
Risk-free rate (driven by monetary policy and macro-factors)
Credit Spread (driven by both country- and company-specific default risk)
Transaction costs

Notice: hedging the currency on foreign debt matters!

Example for General Electric:
Credit spread = 1% in India or 1% in USA
US LIBOR 1.9%; M(umbai)IBOR = 6.3%; -> (Forward- Spot)/Spot ≈ -4.4%
 The INR (USD) is at a discount (premium) on forward market
If GE borrows in USA, the cost is: 2.9%
If GE borrows India, the cost is ≈ 6.3% + 1% - 4.4% = 2.9%

SDA Bocconi Asia Center I Capital Markets

 THANKS YOU

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 If We Have Time

SDA Bocconi Asia Center I Capital Markets

 Outlook
IMF / OECD

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SDA Bocconi Asia Center I Capital Markets
SDA Bocconi Asia Center I Capital Markets
SDA Bocconi Asia Center I Capital Markets
 2019 EMs

SDA Bocconi Asia Center I Capital Markets 2019 EU + US

 THANKS YOU

SDA Bocconi Asia Center I Capital Markets