The International Banking & Money Market

PART I

The International Bond Market

Corporate Sources & Uses of Funds

SOURCES OF FUNDS

Internally Generated Cash

Short-term External Funds

Long-term External Funds

Short & Medium Term Bank loans

Publicly or Privately placed Bonds

International Financial Markets

Markets where foreigners can both borrow and lend money Important international financial centers are London, Tokyo and New York Important financial entrepots or channels are Switzerland, Luxembourg, Singapore, Hong Kong, the Bahamas and Bahrain

The Eurocurrency Market

A Eurocurrency is a dollar or other freely convertible currency deposited in a bank outside its country of origin E.g. US dollars on deposit in London become Eurodollars

The Eurobond Market

Eurobonds are bonds sold outside the countries in whose currencies they are denominated Eurobonds are similar in many respects to the public debt sold in domestic capital markets

The International Bond Market

The bond market is a financial market where participants buy and sell debt securities , usually in the form of bonds As of 2009, the size of the worldwide bond market is an estimated $82.2 trillion , of which the size of the outstanding U.S. bond market debt was $31.2 trillion according to BIS

The International Bond Market

Participants include:

Financial Institutions Governments International Organisations Corporate Issuers

The International Bond Market

The international bond market encompasses two market segments: 1. Foreign Bonds

2.

Eurobonds

Foreign Bonds
A foreign bond is one offered by a foreign borrower to the investors in a national capital market and denominated in the nations currency Example: A German MNC issuing dollardenominated bonds to U.S. investors

Eurobonds
A 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 Example: A Dutch borrower issuing dollardenominated bonds to investors in the U.K., Switzerland, and the Netherlands

Bond Markets
The markets for foreign bonds and Eurobonds operate in parallel with the domestic national bonds market and all the three compete with one another Eurobonds are known by the currency in which they are denominated e.g. Eurodollar bonds, Euroyen bonds, EuroSF bonds etc.

Bond Markets
Sometimes they have colourful names like Yankee bonds ( U.S. dollar), Samurai bonds (JPY), Bulldogs (Stg. Pound) About 80 percent issues are Eurobonds issues Eurobonds are usually bearer bonds

Bond Markets
Global Bonds:
A global bond issue is a very large international bond offerings by a single borrower that is simultaneously sold in North America, Europe and Asia The issues were first offered in 1989

International Bonds- Types of Instruments

Straight Fixed-Rate Issues:
Principal payable on maturity; coupon payments on annual basis

International Bonds- Types of Instruments

Euro-Medium-Term Notes (Euro-MTNs):
Fixed rate notes with maturities from less than a year to about ten years Euro MTN issue is partially sold on a continuous basis

International Bonds- Types of Instruments

Floating Rate Notes (FRNs):
Medium-term bonds with coupon payments indexed to some reference rate (e.g. 3 month LIBOR) Coupon payments are usually quarterly or semiannual

International Bonds- Types of Instruments

Equity-Related Bonds:
1. Convertible Bond: - allows the investor to exchange the bond for a predetermined number of equity shares of the issuer

International Bonds- Types of Instruments

Equity-Related Bonds:
2. Bonds with equity warrants: - a straight fixed-rate bond with the addition of a call option (warrant) feature. The warrant entitles purchase of certain number of equity shares at a prestated price

International Bonds- Types of Instruments

Zero-Coupon Bonds:
Zero- coupon bonds are sold at a discount from face value and do not pay any coupon over their life

International Bonds- Types of Instruments

Zero-Coupon Bonds:
Another form of zero-coupon bonds are stripped bonds A stripped bond is a zero-coupon bond that results from stripping the coupons and principal from a coupon bond (e.g. US Treasury STRIPS)

International Bonds- Types of Instruments

Dual-Currency Bonds:
A dual-currency bond is a straight fixed-rate bond issued in one currency, say, euro, that pays coupon in the same currency
At maturity, the principal is repaid in another currency, say, US dollars

Characteristics of International Bond Market Instruments

Instrument Frequency of Int. payment Annual Quarterly Or semi-annual Annual Annual Size of Int. payment Fixed Variable Fixed Fixed Payoff at Maturity Straight fixed-rate Floating-rate note Convertible bond Straight fixed-rate with equity warrants Zero-coupon bond Currency of issue Currency of issue Currency of issue or conversion to equity shares Currency of issue plus equity shares from exercised warrants Currency of issue Dual currency

None

Zero Fixed

Dual-currency bond Annual

Eurobond Market Structure

Primary Market:

A borrower desiring to raise funds by issuing Eurobonds to investors contacts an investment banker

Eurobond Market Structure

Secondary Market:

Eurobonds initially purchased in the primary market may be resold prior to their maturity in the secondary market It is an over-the-counter market with principal trading in London and some other centers such as Zurich, Luxembourg, Frankfurt and Amsterdam

Advantages of the Eurobond Markets

To Borrowers:

Size and depth of the market are large Freedom and flexibility not found in domestic markets Relatively low costs ( around 2.5%) Interest costs are competitive ( especially dollar Eurobonds) Long maturity periods suitable for long-term funding ( 30 years) Sound institutional framework for underwriting, distribution and placement of securities

Advantages of the Eurobond Markets

To Investors:

Interest can be paid free of income tax Issuers are of high credit standing : government, international organisations or MNCs Convertible Eurobonds value addition Rated instruments

International Bond Amounts Outstanding by Major Instruments

Billions of US Dollars

Dec. 2008 Instrument Straight fixed-rate Floating-rate note Straight fixed-rate with equity warrants Total 14428.4 7892.0 396.7 22717.1

Dec. 2009

March 2010

17274.2 8357.2 447.2 26078.6

17235.9 7988.8 446.1 25670.8

International Bond Amounts Outstanding by Major Issuers

Billions of US Dollars

Dec. 2008 Financial Institutions Governments International Organisations Corporate Issuers Total 17,925.70 1,794.60 637.90 2,359.00 22717.20

Dec. 2009 20,030.10 2,232.20 791.50 3,024.70 26078.50

March 2010 19,531.10 2,254.40 814.10 3,071.20 25670.80

International Bond Amounts Outstanding by Major Currencies

Billions of US Dollars

Dec. 2008

Dec. 2009

March 2010

Euro
US Dollar Pound Sterling

10873.9
8215.1 1701.8

12387.6
9429.0 2145.5

11813.8
9718.1 2028.3

Yen Other
Total

746.7 1179.7
22717.2

693.9 1422.5
26078.5

668.7 1441.9
25670.8

Thank you