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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. – Some nations have surplus & provide credit
- International markets offer direct or intermediated funding
International Retail Banking-indirect finance
- The establishment of retail networks in other countries by banks originally to take advantage of economic development Example:Kookmin bank in NZ
- International diversification by banks may help to smooth out profit performances
International Wholesale Banking
- Major banks will often select a particular market niche of products and services. e.g New Zealand banks
- International wholesale banking tends to be driven by following customers abroad. e.g. entry of Chinese banks to NZ
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
Services offered by International Banks - "Bankers Acceptance"
- 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).
Services offered by major international banks - "Documentary letters of credit"
- Involves importer substituting bank that promises to pay for goods held overseas or imported
- Reduces payment risk
- Began after WWII when 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 mkt grew.
- The Euromarket offers both direct & indirect financing
- Large international market made up of international banks (eurobanks) that accept large deposits & provide large loans.
- "A financial transaction conducted in a foreign country, but not in the currency of that country"
Aspects of euromarkets
Less regulated, often offer better interest rates than local financial markets. Due to large size of transactions.
- Eurocurrency markets
- Euronote markets
- Eurobond markets
Participants in markets may be exposed to foreign exchange
Involves intermediated euromarket transactions (banks accept eurocurrency deposits, provide eurocurrency loans)
- Short-term bank advances
- Eurocurrency standby facilities
Eurocurrency markets - "Short-term bank advances"
- Term loan provided by bank to borrower, but not in currency of country in which bank is located
- Can set up revolving credit arrangement, interest repriced at each rollover date based on reference interest rate such as LIBOR
Eurocurrency markets - "Eurocurrency standby facilities"
Contingency line of credit that is established with a financial institution
Eurocurrency markets - "LIBOR" & "SIBOR"
- LIBOR - London Interbank Offered Rate = the average of rates at which banks in London market will lend to each other
- SIBOR - Singapore Interbank Offered Rate
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.
Medium to Long-term Eurocurrency Bank Loans
- Lead Managers
- Participating Banks
- Agent bank
Medium to Long-term Eurocurrency Bank Loan players - Lead Managers
- Arranger of syndicated debt facility.
- Structures issue, Forms syndicate, prepares documentation
Medium to Long-term Eurocurrency Bank Loan players - Participating Banks
Banks that provide funds as part of syndicated loan facility
Medium to Long-term Eurocurrency Bank Loan players - Agent Bank
Conducts ongoing admin role of established syndicated loan facility
Eurobond market - definition
Bond issued into a foreign market, but not in the currency of that market
Eurobond markets - Multi-stage process for sale of straight Eurobonds
- 1. Decision to issue eurobond (between borrower and lead manager)
- 2. Announcement of eurobond issue
- 3. Offering day with final terms (<2 weeks of public placement)
- 4. Closing day: selling group pays for bonds
Terms relating to eurobonds - Red herring
Prelim prospectus prepared by lead manager
Terms relating to eurobonds - Tombstone
Notice placed in financial press advising details of completed issue of securities
Terms relating to eurobonds - Grey market
Contingent trading in security before actual closing date of the primary issue
Features of eurobonds (interest, fees, location, borrowers (Issuers), investors)
- Interest - most fixed-interest
- Fees - range from 1.5% - 2%
- Location - no physical location
- Borrowers - must have high credit ratings to succeed
- Investors - corporations, domestic/central banks, investment institutions, wealthy individuals