125220 Topic 16: Int'l Capital markets

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125220 Topic 16: Int'l Capital markets
2015-10-21 10:55:08
125220 Topic 16

Int'l Capital markets
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  1. International Capital markets News
    Sept 29 2015
    • • Fears of global economy unsettle investors
    • • WTO slashes global trade forecasts
    • • Slowing Chinese trade seen as main culprit for gloomy outlook
    • • Business conditions worsen in Japan
    • • South Korea logs second-biggest surplus on record
    • • Volkswagen scandal widens & affects cars in US, UK, and Australia
  2. International Stock Exchanges
    • • By market capitalisation first it’s U.S.- NYSE, NASDAQ, then U.K., then Japan-Tokyo, China- Shanghai
    • • By equity, it is NY, NASDAQ, London, Tokyo
    • • Types of share markets – Public, Bank dominated, Private
    • • Competition, mergers & computerisation is changing the face of stock markets e.g. SEAQ vs. Paris & CATS system
    • • Recent examples:
    • – Mergers of LSE & Canada’s TMX proposed Feb 2011
    • – NYSE merges with Euronext (2007), AMEX (2008)
    • • NYSE now offers multiple platforms e.g. NYSE Arca
  3. Overview of major share indices around the world. Where?
    • – Dow Jones DJIA = NY
    • – S&P 500 Composite = NY
    • – NASDAQ =  NY
    • – FTSE 100 = London
    • – Nikkei 225 Stock Average = Tokyo
    • – TOPIX = Tokyo
    • – CAC 40 = France
    • – DAX 30 = German
    • – Hang Seng = Hong Kong
    • – Straits Times = Singapore
  4. Other Features of international equity listings
    • • Multiple listings for large companies
    • – Many companies listing (raising funds) their shares in more than one country (Dual or multiple listing)
    • – In U.S. American Depository Receipts (ADRs) trade on NYSE _AMEX

    • • Why list in other countries as well as in your local country?
    • – Diversify funding - May lower cost of capital for companies
    • – Reduced threat of takeover
    • – Boost reputation
  5. International Debt markets
    Long-term debt- different types of international bonds
    • Foreign Bonds - bonds issued by borrower in country other than borrower's own country, raises funds in currency of foreign market.
    • Eurobonds = A bond issued into a foreign market, but not in the currency of that market
  6. Example of Foreign Bonds
    - Yankee
    - Bulldog
    - Samurai
    - Kangaroo
    • Yankee=Foreign bonds placed in the USA
    • Bulldog=Foreign bonds placed in the UK
    • Samurai=Foreign bonds placed in Japan
    • Kangaroo=Foreign bonds placed in Australia
  7. International Capital (Debt) Markets
    • Many nations are not self-sufficient in funds ⇒ need for transfer of funds between them

    • • NZ & Australia & others- countries having expenditure greater than income & so rely on savings of other countries to balance their shortfalls 
    • – Major nations that provide credit

    • International markets offer direct or intermediated funding
  8. International Retail Banking
    • The establishment of retail networks in other countries by banks originally to take advantage of economic development.

    • Example:
    • • International diversification by banks may help to smooth out profit performances.
    • Example: Kookmin bank in NZ
  9. International Wholesale Banking
    • Major banks will often select a particular market niche of products and services

    • International wholesale banking tends to be driven by following customers abroad.
  10. Services Offered by International Banks
    • Buying & selling foreign exchange
    • Direct or clean payments e.g. for trade-payment before or after receipt of goods, using bank draft & SWIFT.
    • Extension of credit for trade & payments by bills of exchange. Issuance of Bankers’ Acceptances for trade
    • – Bank agrees to pay seller of goods when draft expires on behalf of importer
    • – Acceptance of trade bill ⇒ negotiable instrument & may be traded in money markets (not many in NZ).
    • • Documentary letters of credit
    • – Involves importer substituting bank that promises to pay for goods held overseas or imported
    • – Reduces payment risk
    • • Marketing & underwriting of both domestic & eurocurrency bonds (intermediated bank finance), euronotes & equity shares.
  11. The Euromarket
    - WWII = Soviet Union(Russia) initially moved its US deposits to bank in Paris, with Telex code of Eurobank. Due to various financial restrictions in US, this international market grew.

    Euromarket = large international market made up of international banks (eurobanks) that accept large deposits & provide large loans

    • – Made up of eurocurrency markets
    • – euronote markets
    • – eurobond markets
  12. Eurodollar
    Bond issued in a foreign country and held internationally but is denominated in the domestic currency or a debt security denominated in a currency other than country of origin.
  13. Euroyen
    Euroyen refers to all yen deposits held external to Japan, and does not specifically refer to yen deposits held in the European Union or Europe.

    It also refers to yen traded in the Eurocurrency market.
  14. Eurokiwi
    Refers to all New Zealand deposits held external to New Zealand, not specifically in EU or Europe.

    Refers to NZD traded in the Eurocurrency market.
  15. Short-term to Medium Term euromarkets
    (eurocurrency markets=intermediated section)
    Indirect financing via large international banks

    • Instruments of:
    • • Characterised by large sizes, often syndicated, & borrowers of high repute.
    • • Short-term Bank Loans- repayment of interest & principal by lump sum at end (similar to overdraft)
    • • Stand-by facilities for international companies
    • • Interest rate: LIBOR (London Interbank Offer Rate) or SIBOR (Singapore Interbank Offer Rate) in Asia. Plus margin quoted in basis points depending on credit rating of borrower
  16. • Medium to Long-term Eurocurrency Bank Loans
    • – Minimum size at least USD3 million.
    • – Often involves syndicate of banks with lead manager, comanagers, participating banks, agent banks
    • – Term normally 5-10 years.
    • – Interest rate: LIBOR plus a margin
  17. LIBOR
    • LIBOR = London Interbank Offered Rate
    • LIBOR = rate many banks charge each other for overnight loans & used as benchmark for trillions of dollars of auto, student & other consumer loans.

    Thursday 2nd October '08: LIBOR 3-mth dollar loans rise from 4.15% to 4.21%

    June 2012: major banks have been accused of manipulating LIBOR & so far Barclay’s Bank fined a total of £290m, & in 2015 one trader faces large jail sentence.
  18. The Euronote Markets = international money markets
    Rather than funds being provided by banks, FI may purchase & hold securities or on-sell = direct financing into market

    Active market for s/t promissory notes (discount securities issued by corporations without an acceptor or endorsement)

    • Two broad types:
    • 1) Euronotes Issuance Facility
    • 2) Euro Commercial Paper (ECP)
  19. 1. Euronotes Issuance Facility (NIF)
    • S/T P-notes sold through tender process on an underwritten basis but drawn by borrower under own name
    • - facility can be rollover arrangement
    • - discount securities w. denomination USD 100,000 to 500,000
    • - involves arranger & lead manager, & other agents
  20. 2. Euro Commercial Paper (ECP)
    • Arrangement where P-notes that aren't underwritten (to save costs) are issued into the euromarkets.
    • - needs issuer with high credit rating
    • - small dealer group will market & arrange
    • - discount securities
    • - pricing based on 360 days
    • - typically more than USD250 million
  21. Calculate price of NIF & ECP
  22. Eurobond market
    • Grew in size from the 1980s
    • Broad Classes
    • 1. Euro medium term notes (MTN)
    • - typically unsecured, bearer security with annual coupons
    • - range of maturities, currencies, & fixed- & floating-rate coupons
    • 2. L/t coupon security- fixed rate coupon, floating rate bonds or notes & convertible bonds & warrants
  23. Issue and trading of Eurobonds
    • Sale of straight Eurobonds in primary markets
    A multi-stage process

    • 1) Lead manager arranges bond issue, determines institutions to include and invite them to participate (=co-managers)
    • 2) management group prepares issue, sets final conditions.
    • 3) Often underwriters & selling groups, mgmt group often subscribe to large portion of issue.
    • 4) Lead manager & borrower discuss terms of bond - prepare preliminary prospectus (red-herring)
    • 5) Tombstone - notice advising completed issue of securities
  24. Economics of the Eurocurrency Market
    • • Eurocurrency deposits & loans are created by Eurobanks.
    • • The business of Eurobanking in five regions.
    • Western Europe: London main offshore centre, with
    • offshore centres in the US & Japan.
    • The Middle East: Bahrain
    • Asia: Hong Kong & Singapore
    • The Caribbean: The Bahamas
    • Central America: Panama
  25. Feature of the Eurocurrency Markets
    • 1. The creation of Eurocurrency deposits needs the transfer of a deposit from a country bank to a Eurobank.
    • 2. Eurodeposits are created when Eurobank accepts deposit from lender
    • 3. The amount of extra Eurocurrency deposits depends on how many times.
    • 4. Credit is restricted by the size of the original demand deposit.
    • 5. Deposit and credit creation in Eurocurrency market has
    • virtually no impact on the money supply in participating
    • countries.
    • 5. Eurocurrency deposit rates have to exceed the yields on
    • comparable term deposits in national markets
    • 6. Eurobanks don’t hold reserves against their deposit liabilities.
    • 7. While the passing of a deposit from one bank to another expands size of Eurocurrency market, credit is not created.
    • 8. When a term deposit is passed on from one bank to another the term normally lengthens. So Eurobanks ⇒ maturity intermediation.
  26. Recent Performance of Euromarkets
    • • The fundamental reason for its ongoing growth - the interest rates offered on deposits are generally higher
    • • At the same time, interest rates charged on euromarket loans generally lower
    • • Costs tend to be lower, per dollar of business transacted
    • • The offshore markets are large enough to absorb very large borrowing requirements

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