SOURCING DEBT GLOBALLY

TOPIC 7
SOURCING DEBT FINANCE GLOBALLY

Debt and equity are the means through which firms

can finance their operations.
In the previous topic, we explored how multinational
enterprises (MNCs) source equity abroad.
In this topic, we analyze the methods and choices a
MNC may use to source debt on international
markets
SOURCING DEBT FINANCE GLOBALLY

1. We explore the common financial guidelines that firms follow

when acquiring long term debt.
2. Provide an overview of the major debt markets that are
available to MNCs.
3. “Analyze financial instruments” and “the decision making”
that goes into the selection of specific debt issues in
different currency markets.
SOURCING DEBT FINANCE GLOBALLY
 Debt management and funding goals
 Starting point in sourcing debt globally is determining what types
of debt the MNC wants.
 Hence, apart from the common domestic issues of examining the
cost/quantity of funds needed and the maturity of the debt; the
currency denomination is of great importance in international debt
funding.
 Maturity matching, foreign exchange rate risk and cost of
debt issues, are important in sourcing global debt for the
MNC
SOURCING DEBT FINANCE GLOBALLY -
AND MATURITY MATCHING
 MNCs operate in many foreign markets.
 MNCs own and have access to a continuing series of foreign currency denominated assets and
cashflows.
 The firm may wish to fund these assets with liabilities of not only the same maturity (or maturity
matching), but also the same currency of denomination.
 a firm that acquires debt denominated in a specific currency for asset or liability matching is
focusing on translation/accounting exposures.
 a firm that focusses primarily on matching the currency of cash flow arising from assets and
liabilities is interested in transaction and operating exposures.
 However, the primary emphasis for multinational financial management should be based on cash
flow matching, not accounting conventions and practices. Hence potential benefits arise from
diversifying the sources of long-term debt across currencies in which the MNC’s subsidiaries being
financed earn their cashflow.
 STUDENTS – READ on “how to mitigate foreign exchange rate risk, for the MNC”.
APPROPRIATE FUNDING MIX OVER LIFE OF
SUBSIDIARY
EXTERNAL FUNDING FOR THE MNC SUBSIDIARY
INTERNATIONAL DEBT
MARKETS
 Eurocurrencies : domestic currency of one country on deposit in a
second country.
 : currency held on deposit by governments or
corporations operating outside of their home market.
 : e.g a deposit of U.S. dollars (USD) held in a
British bank would be considered eurocurrency, as would a deposit of
British Pounds (GBP) made in the United States.
 Eurodollars are dollars deposited in banks outside the US,
 EuroSterling are pounds deposited outside the United Kingdom,
 Euroyen are Japanese yen deposited in banks outside Japan.
INTERNATIONAL DEBT
MARKETS
 In this context, euro-banks are banks where
Eurocurrencies are deposited.
 Eurocurrencies are advantageous in that;
1. the Eurocurrency deposits are efficient and convenient
money market products for holding excess corporate
liquidity (for MNCs),
2. the Eurocurrency market are a major source for
acquiring short term bank loans for financing short
term corporate working capital needs (for MNCs)
INTERNATIONAL DEBT MARKETS
 MNCs are able to source debt funding in international
markets via the following two types of markets:

1. International Bond Markets

2. Eurocredits Market

(Student reading on these)

1. INTERNATIONAL BOND MARKET
 International bond markets fall within two generic classifications;
 Eurobond Markets - eurobonds
 Foreign Bond Markets - foreign bonds
 Purchasers of Eurobonds do not rely on bond credit rating services, but
rather on general reputation of the issuing corporation and it’s
underwriters.
 -Firms, whose names/products are better known to the public, are
often believed to have an advantage over equally qualified firms
whose products are less widely known.
 However, rating agencies such as Moody’s and Standard & Poor’s
(S&P’s), provide ratings for selected international bonds (esp. in the case
of Foreign Bonds).
A. EUROBOND MARKET:
 Euro Bond – a debt instrument that is denominated in a currency other than the home
currency of the country or market in which it is issued
 - this can happen on several markets at same time
 - an international bond issued in a Country (A) market, with the bond being
denominated in the currency of another Country (B).
 E.g. …A US$ denominated bond issued in the UK or Australian bond/financial market,
or; Sefalana issuing a Zam Kwacha denominated bond in the South African
bond/Financial Market
 -would be usually targeted to raise low cost capital for an MNC’s operations outside
the financial market jurisdiction in which the bond is issued.
 - e.g. Sefalana wanting to raise capital to develop/set-up subsidiaries in
Zambia
 - underwritten by a syndicate composed of members from various countries in which
the Eurobond issues exist
A. EUROBOND MARKET:
 Eurobond Market – a spatial international market on which bonds of
are particular currency denomination are traded on markets outside
those of the currency of denomination.
 - E.G. US$ Eurobond Market – “all US$
denominated bonds trading on markets outside the USA”; JPY
Eurobond Market; etc
 - has an internationally spatial location
 ADV - this market is not as “regulated as a local
currency registered bond market ; regulators would normally look
more at regulating bond market in their countries that are
denominated in that country’s currency
A. EUROBOND MARKET:
 TYPES OF EUROBONDS
 1. STRAIGHT BOND – has a specified interest coupon and a specified maturity date.

- could carry a fixed rate or floating rate; fl. Rate would be indexed to some
internationally known interest rate series like LIBOR (or USA 10 year Treasury Bill Rate,
etc)
2. CONVERTIBLE EUROBOND – same as above, save that it includes a clause for
the holder/lender to covert the bond to equity/shares in the issuing company at a pre-set
conversion rate (pre-set at time of bond issuance).
3. MEDIUM-TERM EUROBOND – these medium-term Eurobonds/Euronotes are
shorter term Eurobonds with maturities of 3-8 years.
- they can be fixed or floating rate issues

- Eurobonds are underwritten issues; so residual claim for repayment is on the

underwriting bank as opposed to the bond issuer
A. EUROBOND MARKET:

 Eurobonds are underwritten by an international syndicate of banks and other security firms and are
sold exclusively in countries other than the country whose currency the issue is denominated
 Characteristics of Eurobond markets:
 There is absence of, or less regulatory interference since government put stringent measures on
securities that are denominated in domestic currencies and sold within their national boundaries.
 Disclosure requirements are less stringent in the Eurobond market when compared to domestic
issues
 Less time is usually needed and registration costs are less than those of domestic issues.
 Eurobonds offer favourable tax status. This is because they offer tax anonymity and are flexible.
 - For example, interest paid on Eurobonds is generally not subject to withholding tax in most
countries esp USA.
 - Eurobonds are usually issued in bearer form, meaning that the name and country of
residence of the owner is not on the certificate. To receive the interest, the bearer cuts an interest
coupon form from the bond paper and turns it in at a banking institution.
B. FOREIGN BOND MARKET:
• DEF - A bond issued in a domestic market by a foreign entity (MNC) in the
domestic market’s currency.
• - E.G. a bond issued by a firm resident in Germany, denominated in
Canadian dollars and sold to Canadian investors, on the Canadian Bond Mkt,
by Canadian investment banks
• -They are sometimes also taken for an international credit rating.
• -Foreign bonds are underwritten by a syndicate composed of members from
a single country, sold principally within that country, and denominated in
the currency of that country.
• However, the issuer is from another country.
• Foreign bonds have nicknames. For instance, Foreign bonds sold in the U.S
are called ‘’Yankee bonds”, foreign bonds sold in Japan are called “Samurai
bonds’’; and foreign bonds sold in the United Kingdom are known as
“Bulldog Bonds” (or “bulldogs”).
• Can you give other example?
2. EUROCREDITS MARKET
 Eurocredit - a loan whose denominated currency is not the lending
bank's national currency; i.e. a loan that is denominated in a currency
different from the lender's national currency.
 - e.g. a dollar-denominated loan made out by non-U.S.
banks
 - normally made out to MNCs, govts, international institutions, and
other banks
 - usually short to medium term loans – 1 mtn to 8 years
 These are usually syndicated loans
 - because these are large denominated loans, syndication
ensures that the risk is spread among all the lending banks in the
EURO-CREDITS (CONT)

 - have traditionally been sourced in the “Eurocurrency markets”; comprised of

eurocurrency deposits & eurocredits.
 - hence, the banks in the Eurocredit market are the same as those that comprise the
Eurocurrency deposits’ market
 The basic borrowing interest rate for the Eurocredit loans has long been tied to
the London Interbank Offered Rate (LIBOR).
 The key factor attracting both depositors and borrowers to the Eurocurrency
syndicated loan market is the narrow interest spread within the market, with the
deposit and loan rates spread often being less than 1%.
 - offer high deposit rates and low lending rates

 The standby Eurocredits are usually of two types: Eurodollar line of credit and Eurodollar
revolving commitment. Research on how the two types of loans (Euro credits) differ.
ARCHITECTURE/TAXANOMY AND PRODUCTS OF
INTERNATIONAL DEBT MARKETS
INTERNATIONAL
DEBT MARKETS

INTERNATIONAL EUROCREDITS
BOND MARKETS MARKET

EUROBOND FOREIGN BOND

MARKET MARKET

standby ;
STRAIGHT standby ;
CONVERTIBLE MEDIUM-TERM EURODOLLAR
EUROBOND FOREIGN BOND EURODOLLAR
EUROBOND EUROBOND REVOLVING
BOND LINE OF CRADIT
COMMITMENT
SUMMARY
 1. ELEMENTS INVOLVED IN SOURCING DEBT FINANCING GLOBALLY
 - size / currency of denomination / term / bond vs loan / matching principle / etc
 2. EUROCURRENCY MARKET
 - eurocurrency deposits market – pool for eurocredit mkt
 3. INTERNATIONAL DEBT MARKETS
 a. International Bond Markets – Eurobond mkt and Foreign bonds mkt
 b. Eurocredit Market
 4. TAXONOMY / ARCHITECTURE AND PRODUCTS ON THE INTERNATIONAL BOND
MARKETS
 5. STUDENT READINGS / RESEARCH
STUDENT READING/RESEARCH
• Covers both Global Equity and Debt Sourcing
• How many local bonds and equities are listed on the BSE and
what are they?
• How many foreign equities and foreign bonds are listed on the
BSE? Why do you say so?
• In your assessment of the Botswana debt markets, are
international debt offerings a popular option?
 Describe Eurocurrencies and the historical development of the
Eurodollar market.
 Discuss the two main types of standby Eurodollar credits.
 Examine the unique characteristics of Eurobond markets
THANK YOU