International Corporate Finance

dr hab. Agnieszka Preś-Perepeczo

e-mail: [email protected]
Room No 411
Contact hours: Monday (1st week) 10:00-11:30
Financing sources

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Management Decisions

• How will we run our

Operating business?

Investment • What will we buy?

• How will we finance our

Financial business?

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Usage Criteria of Financial Source

Availability Costs Flexibility Leverage Risk

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Types of Firms

• Proprietorships
• Partnerships
– Limited partnerships
• Limited liability companies
• Corporations
– Public company

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Types of Firms

• Proprietorships Low

• Partnerships
– Limited partnerships
• Limited liability companies Financing sources availability

• Corporations
– Public company
High

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Life cycle of company

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Clasification of financing criteria

Sources

Timing Relation

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Timing

Long- Short-
term term

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Sources

Outside sources

Inside sources

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Law relations

Equity Debts

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Hybrid financing

Equity Debts

Debts Equity

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Financing sources
Financing

Outside Inside

Equity Debts Equity

Hybrid

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Financial system and financial markets

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 As globalization steadily erodes the barriers to
cross-border financing, external financing is
increasingly procured from international/foreign
capital markets

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Alternative
sources
of financing

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 Sourcing Equity
from Global Capital Markets

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Alternative
sources
of financing

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Largest stock exchanges in Europe as of June 2023 by
domestic market capitalization

https://www.statista.com/
statistics/693587/stock-
exchanges-market-
capitalization-europe/

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Euronext
Europe’s biggest stock exchange is the Euronext which combines
following markets:
• Euronext Amsterdam, the Netherlands
• Euronext Brussels, Belgium
• Euronext Dublin, Ireland,
• Euronext Lisbon, Portugal,
• Borsa Italiana (Milan), Italy,
• Oslo Børs, Norway
• Euronext Paris, France

https://www.euronext.com/en/about

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Nasdaq Nordic and Baltic Exchanges
The Nasdaq Nordic and Baltic Exchanges include following markets:
• NASDAQ OMX Nordic Copenhagen, Denmark
• NASDAQ OMX Nordic Helsinki, Finland,
• NASDAQ OMX Nordic Stockholm, Sweden,
• NASDAQ OMX Nordic Iceland, Iceland,
• NASDAQ OMX Riga, Latvia,
• NASDAQ OMX Vilnius, Lithuania
• NASDAQ OMX Tallinn, Estonia

https://nasdaqbaltic.com/

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Others
• Deutsche Boerse AG include Boerse Frankfurt, Boerse Stuttgart,
Berlin, Duseldorf, Hamburg, Munchen

• BME Spanish Exchanges include Bolsa de Madrid, Barcelona,

Valencia, and Bilbao

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 Largest stock exchange
operators worldwide
as of October 2022

https://www.statista.com/statistics/270126/
largest-stock-exchange-operators-by-market-
capitalization-of-listed-companies/

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 The largest
companies in
the world by
market
capitalization
in 2023

https://www.statista.com/
statistics/263264/top-
companies-in-the-world-by-
market-capitalization/

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Cross-listing on a foreign market
• Cross-listing on a foreign market may be achieved in different ways ranging
from limited trading on the over-the-counter market to full-fledged listing of
the firm’s original shares.
• Firms may choose to list their stock in a foreign stock market either directly
or through a depositary receipt (DR) program.
• Foreign firms may choose a direct listing by issuing their ordinary shares in a
foreign market that will trade in all respects like any domestic firms’ shares.
• The issuing firm will have to meet all regulatory requirements of the host
market’s securities laws as well as its disclosure, reporting, and accounting
rules.
• The U.S. capital markets are the preferred destination of many cross-listing
firms.

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ADR - Cross-listing on a foreign market
• In most instances cross-listing firms will choose an intermediate strategy
through a depositary receipts program.
• American depositary receipts (ADRs) a negotiable certificate issued by a
U.S. depositary bank representing a specified number of shares—usually
one share—of a foreign company's stock.
• ADRs make it convenient and greatly reduce the costs of investing in
foreign shares.
• They are denominated in U.S. dollars, are traded in the United States like
any other U.S. shares, and pay dividends in U.S. dollars.
• ADR or GDR program is less costly path than direct cross-listing on a
foreign market.

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Types of American Depositary Receipts
There are three types of ADR programs:
• Level I ADRs allow the stock to be traded OTC only,
• Level II allows exchange trading,
• Level III allows all types of trading as well as capital raising.
Issuers are subject to full reporting with the SEC.

American depositary receipts come in two basic categories:

• Sponsored ADRs - A bank issues a sponsored ADR on behalf of
the foreign company. All except the lowest level of sponsored
ADRs register with the SEC and trade on major U.S. stock
exchanges
• Unsponsored ADRs - This certificate has no direct involvement,
participation, or even permission from the foreign company;
They trade only over the counter. Unsponsored ADRs never
include voting rights
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Global Depositary Receipts
• Other major capital markets in Europe such as London, Paris, or
Frankfurt, or in Asia (Hong Kong or Tokyo) also play host to such
cross-listing either directly or through global depositary receipt
(GDR) programs.
• A global depositary receipt is very similar to an American
depositary receipt (ADR) except that an ADR only lists shares of a
foreign company in U.S. markets.
• A global depositary receipt (GDR) is a negotiable financial
instrument issued by a depositary bank. It represents shares in a
foreign company and trades on the local stock exchanges in
investors' countries.
• GDRs and their dividends are priced in the local currency of the
exchanges where the GDRs are traded.

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Why do firms cross-list?

• The primary purpose for firms to list their shares on a foreign stock
exchange is to reduce their cost of capital. Well-developed capital
market, foreign firms are gaining access to a larger pool of investors.
Better-diversified investors accept a lower required rate of return on their
equity investments, which results in richer value and therefore a lower
cost of capital for the cross-listing firm.
• Additional motivations for cross-listing are to establish name recognition
and to boost the firm’s visibility in foreign markets in order to pave the
way toward an equity offering.
• Furthermore, if strategic acquisitions are contemplated, having one’s stock
listed and traded in the target firm’s market would greatly facilitate the
financing of the acquisition of the target firm.
• Cross-listing firms have higher growth opportunities than their peers that
do not cross-list.

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Case study - cross-listed companies

POLSKI KONCERN NAFTOWY ORLEN S.A. KGHM POLSKA MIEDZ S.A.

IPO 26-11-1999, listed on IPO 01-07-1997, listed on:
• Warsaw Stock Exchange • Warsaw Stock Exchange
• Bern Stock Exchange • Boerse Berlin
• Boerse Berlin • Boerse Duesseldorf
• Boerse Duesseldorf • Boerse Frankfurt
• Boerse Frankfurt • Boerse Hannover
• Boerse Munchen • Boerse Munchen
• Boerse Stuttgart • Boerse Stuttgart
• London Stock Exchange • London Stock Exchange
• Prague Stock Exchange • Prague Stock Exchange

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 Sourcing Debt
from Global Bond Markets

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Alternative
sources
of financing

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What Is the Bond Market?
The bond market—often called the debt market, fixed-income
market, or credit market—is the collective name given to all trades
and issues of debt securities.

Governments typically issue bonds in order to raise capital to pay

down debts or fund infrastructural improvements.

Publicly traded companies issue bonds when they need to finance

business expansion projects or maintain ongoing operations.

https://gpwcatalyst.pl/en-home https://www.bondspot.pl/company

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Types of Bonds
• Corporate Bonds
• Government Bonds
• Municipal Bonds
• Mortgage-Backed Bonds (MBS)

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The global bond market in US
The global bond market is segmented in two ways:
• (1) across different currency spaces (bond market in U.S. dollars
or Japanese yen and many others)
• (2) between the domestic/onshore and the external/offshore
tiers.

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Market Tiers for Dollar-Denominated Bonds in the U.S.

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Global bond market
The global bond market is comprised of three distinct tiers:
• Domestic bonds are issued locally by a locally domiciled borrower and are
denominated in the local currency. Domestic bonds generally account for the
bulk of a national bond market.
• Foreign bonds are also issued locally and denominated in the local currency but
the borrower (issuer) is domiciled abroad. Foreign bond issuers are subject to
the same disclosure requirements as domestic firms. Regulatory authorities in
countries where foreign bonds are issued make legal distinctions between such
foreign bonds and domestic bonds.
• Eurobonds are issued and placed in a jurisdiction outside the country of the
currency of denomination. A Eurobond is a debt instrument that's denominated
in a currency other than the home currency of the country or market in which
it is issued.

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Eurobonds
Eurobonds are typically:
• (1) issued by an international syndicate of banks,
• (2) placed simultaneously in a large number of countries except for
the country of the currency of denomination,
• (3) offered in bearer form and not subject to withholding tax.

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Eurobonds
• Eurobonds are important because they help organizations raise capital while
having the flexibility to issue them in another currency.
• Eurobond refers only to the fact the bond is issued outside of the borders of the
currency's home country; it doesn't mean the bond was issued in Europe.
• A Eurobond is a bond issued offshore by governments or corporates
denominated in a currency other than that of the issuer's country. Eurobonds
are usually long-term debt instruments.
• Eurobonds are typically denominated in US Dollars (USD), Euro, Pound,
Japanese Yen, Swiss Francs and other currency denominated Eurobonds are also
available.
• They are generally issued with 5-30 years of maturity.
• The coupon interest may be fixed or floating. Payments may be annual or semi-
annual.
• Eurobonds offer partial tax advantages. Eurobonds are thus very popular with
asset managers domiciled in tax havens, such as Switzerland, the Cayman
Islands, or Hong Kong.
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Benefits to Issuers
A list of benefits to Eurobond issuers consists of the following:
• Flexibility to choose a favorable country to originate bonds and
currency
• A country choice with lower interest rates
• Avoidance of currency risk or forex risk by using Eurobonds
• Access to a huge range of bond maturity periods that can be
chosen by the issuer
• International bond trade despite being issued in a certain country
that broadens potential investor base

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The first Eurobond
• The first Eurobond was issued in July 1963 by Autostrade, the company
that ran Italy's national railroads. The issue was guaranteed by the
Italian government.
• It was a $15 million eurodollar bond designed by bankers in London,
issued at Amsterdam Airport Schiphol and paid in Luxembourg to reduce
taxes.
• The issue was underwritten and placed by the London merchant bank
S.G. Warburg with Banque de Bruxelles S.A., Deutsche Bank AG, and
Rotterdam Bank NV as co-managers.
• The bonds could not be offered to the general public because they were
not registered in any of the European countries. Instead they were
placed privately, mostly with Swiss banks.
• Sixty thousand bonds were issued with a face value of $250 each, and
paid an annual coupon of 5.5 percent on July 15 of each year.

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Case study - PGE Polska Grupa Energetyczna S.A.
• Euro Medium Term Note Programme was established on May 22, 2014.
Under the programme, PGE Sweden AB (publ) with its registered office
in Stockholm, 100% subsidiary of PGE Polska Grupa Energetyczna S.A., is
allowed to issue Eurobonds up to EUR 2,000,000,000 with a minimum
maturity of 1 year.
• Liabilities of PGE Sweden arising from the issue of the Eurobonds are
guaranteed by PGE Polska Grupa Energetyczna S.A. The guarantee
amounts to EUR 2,500,000,000 and will be valid until December 31,
2041.
• First Eurobonds issue in amount of EUR 500,000,000 was made on June
9, 2014. Eurobonds were listed on the Luxembourg Stock Exchange,
and were bought out in June 2019.
• In addition, another issue in amount of EUR 138,000,000 took place in
August 2014. Maturity date is August 1, 2029. The issue was assigned
BBB+ rating by Fitch.

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Case study - Financing model within PGE Group in PGE
Sweden AB
Eurobonds issuer within PGE Group in PGE Sweden AB is PGE which is a special
purpose company functioning on the Swedish market. PGE Sweden AB grants
loans to PGE S.A. from the proceeds received under the financing. Then PGE SA
performs reallocation of funds between subsidiaries of PGE Group.

https://www.gkpge.pl/en/for-investors/bonds/eurobonds
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Adopting the resolution on the establishment of the
EMTN Programme by PKO Bank Polski S.A.

• https://infostrefa.com/infostrefa/pl/raporty/espi/firmy/514,2022,8,8,1

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Corporate bonds
• Corporate bonds are typically classified as either investment-grade or else
high-yield (or "junk").
• This categorization is based on the credit rating assigned to the bond and
its issuer.
• An investment-grade rating signifies a high-quality bond that presents a
relatively low risk of default. Bond-rating firms like Standard & Poor’s and
Moody's use different designations, consisting of the upper- and lower-case
letters "A" and "B," to identify a bond's credit quality rating.
• Junk bonds represent bonds issued by companies that are financially
struggling and have a high risk of defaulting, or not paying their interest
payments or repaying the principal to investors.
• Junk bonds are also called high-yield bonds since the higher yield is
needed to help offset any risk of default. These bonds have credit ratings
below BBB- from S&P or below Baa3 from Moody's

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Credit Rating Agencies
• Credit rating agencies such as Standard & Poor’s (S&P), Moody’s,
or Fitch for years immemorial have provided credit rating on
domestic and international bonds and their issuers, whether they
are corporations, municipalities, or sovereigns.
• The rating is an overall assessment of the borrower’s
creditworthiness given the specifics of the debt obligation – that
is, a gauge of the borrower’s ability to pay interest and to repay
principal on time and in full.
• The ratings are constructed on the basis of a comprehensive
analysis of the firm’s actual and projected cash flows, taking into
account its long-term growth prospects.

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Standard
& Poor’s
Credit Notations

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Capital structure

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Simple Balance Sheet

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Leverage – an important financial performance metric
• Looking at how a company is financed indicates how much
leverage it has, which in turn indicates how much financial risk
the company is taking.

• Comparing debt to equity and debt to total capital are common

ways of assessing leverage on the balance sheet.

• Debt to Equity ratio (D/E Ratio - also called the “debt-equity

ratio”, “risk ratio”, or “gearing”), is a leverage ratio that
calculates the weight of total debt and financial liabilities
against total shareholders’ equity.

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Debt to Equity Ratio
• Debt to Equity ratio (D/E Ratio - also called the “debt-equity
ratio”, “risk ratio”, or “gearing”), is a leverage ratio that
calculates the weight of total debt and financial liabilities
against total shareholders’ equity.

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What is Total Debt?

Considered debt: Not considered debt:

• Long-Term Debt • Accounts payable
• Current portion of Long- • Accrued expenses and
Term Debt deferred revenues
• Bonds payable • Dividends payable
• Capital lease obligations
• Drawn line-of-credit
• Notes payable (maturity
within a year and more
than a year) - loan
between two parties

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What is Shareholders’ Equity
Share Capital
• This is the value of funds that shareholders have invested in the company.
When a company is first formed, shareholders will typically put in cash.
• For example, an investor starts a company and seeds it with $10M. Cash
(an asset) rises by $10M, and Share Capital (an equity account) rises by
$10M, balancing out the balance sheet.

Retained Earnings
• This is the total amount of net income the company decides to keep.
• Every period, a company may pay out dividends from its net income.
• Any amount remaining (or exceeding) is added to (deducted from)
retained earnings.

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Benefits and threats of a High D/E Ratio
Benefits:
• Using more debt (increasing the debt-equity ratio) increases the
company’s return on equity (ROE)
• The cost of debt is lower than the cost of equity, and therefore
increasing the D/E ratio (up to a certain point) can lower a firm’s
weighted average cost of capital (WACC).

Threats:
If the debt to equity ratio gets too high:
• any losses will be compounded down and the company may not
be able to service its debt
• the cost of borrowing will skyrocket, as will the cost of equity,
and the company’s WACC will get extremely high, driving down
its share price

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Additional comments

A higher debt-equity ratio indicates a levered firm, which is quite

preferable for a company that is stable with significant cash flow
generation, but not preferable when a company is in decline.

Conversely, a lower ratio indicates a firm less levered and closer to

being fully equity financed.

The appropriate debt to equity ratio varies by industry.

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Homework
Read the Chapters 9, 10, and 11
Laurent L Jacque (2020): International Corporate Finance: value
creation with currency derivatives in global capital markets, John
Wiley & Sons

Other materials
• https://corporatefinanceinstitute.com/resources/commercial-lending/de
bt-to-equity-ratio-formula/
• https://corporatefinanceinstitute.com/resources/fixed-income/eurobond
/
• https://www.investopedia.com/terms/a/adr.asp
• https://www.investopedia.com/terms/g/gdr.asp
• https://www.icmagroup.org/About-ICMA/history/history-of-the-eurobond
-market/

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