International Financial Markets

July 16, 2009 14.30 to 18.40 hours Slide 1

 International Banking
 Domestic Banks Vs. International Banks
 International Banking Services
• Enablers
 facilitate imports and exports by resolving the ‘importer-exporter’ dilemma; arrange trade financing
 arrange necessary forex for customers to conduct cross-border transactions
 facilitate their customers to hedge their exchange risks with various products
 facilitate implementation of global cash management services
 act as market makers for various financial products
 accept international deposits and make global loans and investments
 participate in global syndicate of lenders and underwriters
 provide expert consultancy services to clients

A bank that provides ‘all services’ is referred to as ‘Universal Bank’ or

‘Full Service Bank’
London, New York, Singapore and Tokyo are also referred to as ‘Full
Service Centers’
July 16, 2009 14.30 to 18.40 hours Slide 2
 Types of Banking Offices
 Correspondent Bank
• This creates ‘Agency Relationship’ between two banks in different locations, where the arrangement is “you take care of
my local interests there and I take care yours here’
• Facilitates ‘outsourcing of activities’
• But it is never worthwhile to handover your clients to be serviced by someone else
 Representative offices
• No commercial businesses get transacted. However, officials are posted in a place where Banks’s major MNC customers
operate and the Bank has established a correspondent relationship
 Foreign Branches
• Part of the parent Bank which is headquartered in another country, the foreign bank branch operates under both Central
banks
• Can provide full range of services to MNC customers, unlike rep. offices
 Offshore Banking Centers (rather this is a country, not a bank)
• These centers provide total freedom from host-Government banking regulations, such as reserve requirements, deposit
insurance, low taxes and possibly strong secrecy clauses.
• Singapore, HK, Cayman Is, Panama, Bahamas and Bahrain are such centers
• The banks in OBC seek non-local currency deposits and make such loans
 Subsidiary and Affiliate Banks
• Subsidiaries are under the control of an overseas parent bank whereas in Affiliate banks, the parent Bank takes significant
interest, but do not retain management control

July 16, 2009 14.30 to 18.40 hours Slide 3

 Resource mobilisation in Global Mkts
 Cost considerations
• If you are the CFO of a large Indian Company and you take a look at the LIBOR interest rates (base), … (see next slide)
• However, interest rate advantage is balanced by the cost of hedging currency risk.
• Given the same credit rating, credit premium in global markets tend to be lower, owing to the markets being much larger
and more appreciative of credit risks.
 Currency matching
• Equity or debt is mobilized in foreign currency in order to meet outflows in the same currency, say, for overseas
investment, for acquisitions or for payment of project imports. A USD loan to meet imports billed in USD is more
economical than a JPY loan, even if the latter carries lower rate of interest.
 Diversification
• If the size of equity or debt funds to be mobilized is relatively large, the issuer may prefer to approach global markets to diversify the
investor base. The investors across the markets absorb large issues (which may not be common in domestic markets), help bring down the
cost of funds,
 Globalised risk management
 International Brand Building
• Especially Indian Companies – gives bragging rights “We are a NASDAQ listed company….”

July 16, 2009 14.30 to 18.40 hours Slide 4

 https://www.global-rates.com/en/interest-rates/libor/libor.aspx

July 16, 2009 14.30 to 18.40 hours Slide 5

 Types of Bonds in Global Markets
 Straight Fixed Rate - “Plain vanilla”
• Most international bonds are of this type
• Specified maturity date with Fixed coupon payments (% of par value),
• Eurobond interest is typically paid annually,
• Less costly for issuers
• No options (e.g., convertibility) attached
• Entire issue brought to market at one time.

 Euro-Medium Term Notes (Euro MTNs)

• Similar to straight fixed rate bonds in that they have a fixed maturity and carry a fixed coupon rate.
• Unlike a straight fixed rate bond, they are sold on a “continuous basis” through some prearranged period
(called an issuance facility).
• Allows issuers to raise money as needed
• Generally carry maturities from less than 1 year out to 10 years.

July 16, 2009 14.30 to 18.40 hours Slide 6

 Types of Bonds in Global Markets
 Floating Rate Notes (FRNs)
• Coupon rate is indexed to some reference rate, usually LIBOR
• Coupon reset at time of interest payment for the next period.
• Coupon payments generally every 6 months.
• U.S. dollar and euro notes dominate this segment.

 Quasi-Equity Bonds
• Convertible issues (FCCBs)
 Fixed income bond which, allows the holder to exchange the bond for a predetermined number of share of common
stock.
• Carry lower interest rates than a straight only bond.
• Bonds with Equity Warrants
• Fixed income bond with Call option (or warrant) feature which allows the holder to purchase a certain
number of equity shares at a pre-stated price over a predetermined period of time.

July 16, 2009 14.30 to 18.40 hours Slide 7

 Types of Bonds in Global Markets
 Zeros (ZCB)
• Sold at a discount from face (par) value and do not pay any coupon interest
• At maturity, holder receives full face (par) value.
• Return is represented by the difference between price and face value.
• Most popular currencies have been the U.S. dollar and Swiss franc.
• Especially attractive to Japanese investors as their tax laws treat the return as a tax free capital gain (and
coupon payments are taxable)

 Dual-Currency Bonds
• Fixed rate bond that pays interest in one currency, and upon maturity, pays principal value in another
currency.
• Popular among Japanese firms:
 Coupon payments in yen; principal repayment in dollars.
 Used by Japanese companies wanting to establish or expand U.S. based subsidiaries.
 Subsidiaries would generate the dollars needed to pay off the principal.

July 16, 2009 14.30 to 18.40 hours Slide 8

 Types of Bonds in Global Markets
 Currency Option Bond:
• A currency option bond is one for which the coupons and/or the principal can be paid in two, or more
currencies, as chosen by the bondholder.
• It benefits the investor who can always select the stronger currency.
• The interest rate set at issue is always lower than the yields paid on a single currency straight bond
denominated in either currency.

July 16, 2009 14.30 to 18.40 hours Slide 9

 Characteristics of International Bond
Market Instruments
Instrument Frequency of Size of Payoff at
Payment Coupon Maturity
Straight Fixed-Rate Annual Fixed Currency of issue

Floating Rate Note Every 3 or 6 months Variable Currency of issue

Convertible Bond Annual Fixed Currency of issue

or conversion to
equity shares.
Straight fixed rate Annual Fixed Currency of issue
with equity warrants plus conversion to
equity shares.
Zero None Zero Currency of issue

Dual Currency Annual Fixed Dual currency

July 16, 2009 Bond to 18.40 hours
14.30 Slide 10
 International Bond Markets
 There are no specific designated or unified International Bond Market
 There are, however, three broad market groups :
• Domestic Bonds
• Foreign Bonds
• Euro Bonds
 Domestic Bonds are issued by the issuer in home country – Tata Steel issuing debentures in India
 Foreign Bonds are issued by a foreign corporation in a overseas country in the local currency (of the
overseas country) – Reliance Industries issuing Yankee Bonds in New York
 Euro Bonds are issued by a foreign corporation in a currency which is different from the local market
(of the overseas country) – Tata Steel issuing FCCB denominated in USD in Luxembourg
• It is interesting to note that the reason for exemplary growth of Euro
Bond Markets is because of ‘lack of regulations’ compared to the
tight regulations on Foreign Bond Markets
• Together with Foreign Bonds, Euro Bonds dominate the Intl’ Bond
Markets
July 16, 2009 14.30 to 18.40 hours Slide 11
 Why?

July 16, 2009 14.30 to 18.40 hours Slide 12

 The larger Markets
 The Euro Bond Markets are just one segment of Euromarkets
 Euromarkets include
• Euro Currency Markets
• Euro Notes Markets
• Euro Commercial Paper and
• Euro Equity Markets
 Essentially an ‘offshore market’ where borrowers and lenders come together because there are no
regulations and hence lower costs
 Stimulus for development of Euromarkets
1. Formation of EEC (Now EU) allowing countries to test with USD for financing trade
2. Difficulties of GBP in mid fifties and associated controls imposed by BOE on Non-Resident Borrowing
and Lending in GBP
3. Imposition of Interest Equalisation Tax by US (1963) and Foreign Restraint Credit Program (FRCP –
1965) on investment earnings of Resident Americans to dissuade investment out of US

July 16, 2009 14.30 to 18.40 hours Slide 13

 Growth of EuroMarkets
 Restrictions and controls stimulated the development of Euro Markets. Therefore, absence of these
regulations should have killed the markets
 However, even after the restrictions have been removed (as of now), these markets have continued to
grow, essentially due to absence of SLR equivalent regulations, absence of withholding taxes, etc.
 Another reason is that because of the absence of controls (reserve requirements) or deposit insurance,
Eurodollar deposits are more attractive than deposits held inside of US. Therefore, the banks can
afford to give loans based on deposits on more attractive terms to hard-nosed MNCs
 Therefore, the cost of these loans are lower and the banks are able to onward lend at lower interest
costs to the borrowers
 US and European Corporations account for about 75% of the borrowings in EuroMarkets
 According to BIS, most (90%+) Governments and State Agencies borrow Straight Bonds (Fixed),
Corporates (approx 75%) in Straight Bonds and financial institutions (about 45%) in the floating rate
segment

July 16, 2009 14.30 to 18.40 hours Slide 14

 International Money Markets
 Int’l Money Markets is almost synonymous with Eurocurrency market
 Eurocurrency is a time deposit of money in an international bank located in a country different from the country
that issued the currency
• Eurodollars are US$ denominated deposits that are deposited in banks outside of US
• Eurosterling are GBP denominated deposits that are deposited in banks outside of the UK
• Eurorupees (!) are INR denominated deposits that are deposited in banks outside of India
• The bank in which deposit is made need not be located in Europe
 The Eurocurrency is a product of the cold war during 1950s and 1960s
• The Bank that accepted the deposits was a French Bank with Telex address as ‘EURO-BANK’. Hence the name
 Eurocurrency market is an external banking system that runs parallel to the domestic banking system of the
country that issued a currency.
 Because of absence of regulations, the Eurocurrency markets have grown tremendously over the years.

July 16, 2009 14.30 to 18.40 hours Slide 15

 More on Eurocurrency Markets
 This market operates at very high volumes per transaction and hence is wholesale. No retail investors
can participate in these markets because of the sheer size of the transactions – minimum volume starts
at $1 mn

 LIBOR is London, SIBOR is Singapore and TIBOR is Tokyo (and what is NIBOR?)

 EURIBOR is the rate at which interbank deposits of the Euro are offered by prime banks to another in
the euro zone.

 The rates of deposits are quoted for 2 days (call), 7 days notice, one month, 2 months, three months,
six months and 12 months

 These banks offer Eurocredits (short to medium term loans) to corporates, sovereign governments,
non-prime banks and international organisations.

 Usually these loans are large and hence offered as a syndicate of banks and are quoted as ‘LIBOR + x
bps’.

July 16, 2009 14.30 to 18.40 hours Slide 16

 What are Eurobonds?
 A Foreign bond issue is one offered by a foreign borrower to the investors in the national capital market and
denominated in that nation’s currency
• For example, in 1996-97, Reliance issued 100 year Yankee Bonds – these are foreign bonds – because Reliance is an Indian
company issuing USD denominated bonds to the US Investors
 Eurobond issue is one denominated in a particular currency but sold to investors in national capital markets other
than the country that issued the denominating currency
• To continue with the previous illustration, if Reliance had issued these dollar denominated bonds in
London/Frankfurt/Singapore, these bonds would have been called ‘Eurobonds’
 Switzerland is the largest Foreign Bond Market in the world
 Foreign bonds have some interesting names – for example,
• Bulldogs are sterling denominated bonds sold in UK
• Samurais/Shoguns are Yen denominated bonds sold in Japan
• Yankees are USD denominated bonds sold in the US
• Matadors are issued in Spain
• Maharajas/Kohinoor are issued in India
• Rembrandts are issued in Netherlands

July 16, 2009 14.30 to 18.40 hours Slide 17

 Extract from Annual Report 1997 of Reliance Inds. Ltd

July 16, 2009 14.30 to 18.40 hours Slide 18

 More on Bonds and Issue of Bonds
 Eurobonds are usually bearer bonds – possession is evidence of ownership
 No records are kept by issuer for current ownership
 Attractive for tax evaders; hence lower pricing is possible (usually 10-120 bps cheaper); Also have
annual coupons
 Registered Bonds are ‘non-bearer bonds’; can have multiple coupons
 Yankee bonds sold to US residents have to be Registered Bonds
 A Global Bond Issue is a very large borrowing by a single borrower simultaneously in several
markets – 1989 first time. Largest by Deutscche Telekon for $14.6 bn with USD, EUR and JPY
components.
 Dual currency bonds are straight fixed rate bond issued in one currency, paying interest in same
currency, but redeemed in another currency.
 Euroclear and Clearstream are the two major clearing agencies that deal with Eurobonds

July 16, 2009 14.30 to 18.40 hours Slide 19

 Placing Euro/Foreign Bonds
 Bonds are usually sold to Lead Merchant Banker or his Syndicate at a discount (ie. Net of
Management Commission) – LM may/may not pass this benefit down the line to the investors
 LM Assistance will be required for:-
• Underwriting, marketing, placement
• Price discovery through book building process
• Rating agency advisory
• Prospectus, information memorandum preparation
• Guidance on market timing
• Market making, particularly in the after-issue market
 Road shows precede such issues; Not possible to sell the issues without ‘investment grade ratings’

July 16, 2009 14.30 to 18.40 hours Slide 20

 Time table for a new issue
 Total time taken is usually 5 to 6 weeks

 This is broken down into:-

• discussion between lead manager and borrower - about 2 weeks (or more).
• Announcement of international bond issue (1 to 2 weeks of pre-placement).
• offering day with final terms (2 week public placement)
• Closing day: selling group pays for bonds

 After closing day, the bonds can be publicly traded

July 16, 2009 14.30 to 18.40 hours Slide 21

 A ‘Tombstone’ of Global Bond Issue

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July 16, 2009 14.30 to 18.40 hours Slide 24
 How do we see recognise these
liabilities at Company Level?

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July 16, 2009 14.30 to 18.40 hours Slide 26
 THE
END OF
CLASS

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