International Capital Markets

Corporate Sources of Funds

• General Sources of Funds

• Internally-generated cash
• Short-term external funds
• Long-term external funds

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International Capital Markets
• Capital is a financial resource used by firms to buy long-term assets
• Capital is raised form the Capital Market
• A capital market consists of
• people, companies and governments with an excess of funds that they want to lend
• people, companies and governments that have a shortage of funds and want to borrow
• There are two main ways that someone accesses the capital markets
• They issue
• Debt or
• Equity
• Debt is money that’s borrowed and must be repaid
• Equity is money that is invested in return for a percentage of ownership but is not
guaranteed in terms of repayment
International Capital Markets
• International Money Markets
• Commercial banks
• Offshore markets
• International Debt (Bond) Markets
• Offshore (euro) bonds
• Foreign bonds
• International Equity Markets
International Capital Markets
• International capital markets operate on similar lines but in the global
sphere
• In the International capital markets, governments, companies, and
individuals borrow and invest across national boundaries
• International capital markets provide the following benefits
• Higher returns and cheaper borrowing costs
• Diversifying risk-The international capital markets allow individuals,
companies, and governments to access more opportunities in different
countries to borrow or invest which in turn reduces risk
Primary and Secondary Markets
• Capital markets consist of primary and secondary markets
• The primary market is where new securities (stocks and bonds) are issued
• If a corporation or government agency needs funds, it issues (sells) securities to
purchasers in the primary market
• Big investment banks assist in this issuing process as intermediaries
• The secondary market includes stock exchanges (the New York Stock Exchange, the
London Stock Exchange, and the Tokyo Nikkei), bond markets, and futures and options
markets
• All these secondary markets deal in the trade of securities
• The term securities includes a wide range of financial instruments the most familiar
ones being stocks and bonds
• Investors have essentially two broad categories of securities available to them: equity
securities
Primary and Secondary Markets
• In case of debt or equity securities the issuing entity a company or
government only receives the cash in the primary market issuance
• Once the security is issued it is traded in the secondary market but
the company does not receive any further financial benefit from that
security
• However companies are motivated to maintain the value of their
equity securities or to repay their bonds in a timely manner so that
when they want to borrow funds from or sell more shares in the
market they have the credibility to do so
International Financing
• For companies the global financial markets
• Provide stability and predictability
• Help reduce risk
• Provide access to more resources
• One of the fundamental concept of capital market liquidity
• It means being able to convert a noncash asset into cash without losing
any of the principal value
• In the case of global capital markets, liquidity refers to the ease and speed
by which shareholders and bondholders can buy and sell securities in the
global market and convert their investment into cash when necessary
• Liquidity is also essential for foreign investment as companies don’t want
their profits locked into an illiquid currency
Major Components of the International Capital Markets
• International Equity Markets
• International equity markets consists of all the stocks traded outside
the issuing company’s home country
• Many large global companies seek to take advantage of the global
financial centres and issue stock in major markets to support local
and regional operations
• For example, ArcelorMittal is a global steel company headquartered
in Luxembourg
• It is listed on the stock exchanges of New York, Amsterdam, Paris,
Brussels, Luxembourg, Madrid, Barcelona, Bilbao, and Valenci
GDR
• Global Depository Receipt (GDR) is an instrument through which a
company located in domestic country issues one or more of its shares or
outside the domestic country
• In GDR an overseas depository bank i.e. bank outside the domestic
territory of a company issues shares of the company to residents outside
the domestic territory
• Such shares are in the form of depository receipt or certificate created by
overseas the depository bank
• Issue of Global Depository Receipt is one of the most popular ways to tap
the global equity markets
• A company can raise foreign currency funds by issuing equity shares in a
foreign country
GDR
• Global Depositary Receipts (GDRs) are negotiable certificates issued by
depositary banks which represent ownership of a given number of a
company’s shares which can be listed and traded independently from the
underlying shares
• These instruments are typically used by companies from emerging markets
and marketed to professional investors only
• GDRs can be listed on International Securities Market
• GDR has access to two or more markets usually London and the US
• They are often launched for capital raising through private placement or
through public offer
GDR
• A company based in USA, willing to get its stock listed on German stock exchange can do so with
the help of GDR
• The US based company shall enter into an agreement with the German depository bank, who
shall issue shares to residents based in Germany after getting instructions from the domestic
custodian of the company
• The shares are issued after compliance of law in both the countries
• GLOBAL DEPOSITORY RECEIPT MECHANISM
• The domestic company enters into an agreement with the overseas depository bank for the
purpose of issue of GDR
• The overseas depository bank then enters into a custodian agreement with the domestic
custodian of such company
• The domestic custodian holds the equity shares of the company
• On the instruction of domestic custodian the overseas depository bank issues shares to foreign
investors
• The whole process is carried out under strict guidelines
• GDRs are usually denominated in U.S. dollars
 ADR
• American Depository Receipt (ADR) is an instrument through which a
company located in domestic country issues one or more of its shares in the
US
• American Depository Receipt provide US investors with an opportunity to
trade in shares of a foreign company
• Volkswagen, a German company trades on New York Stock Exchange
• If the shares of Volkswagen are listed in stock markets of countries other than US then it is
termed as GDR
International Bond Markets
• Bonds are the most common form of debt instrument
• It is basically a loan from the holder to the issuer of the bond
• The international bond market consists of all the bonds sold by an
issuing company, government, or entity outside their home country
• Companies might access the international bond markets to fund a
new production facility or expand its operations in one or more
countries
• There are several types of international bonds
 International Bond Markets
• Foreign Bonds
• Issued by a non-resident and denominated in the currency of the
country in which it is being offered
• GE issuing a yen denominated bond in Japan
• Eurobond
• Issued by a non-resident and denominated in a currency other than the
currency of the country in which it is being sold.
• GE issuing a dollar denominated bond in Europe.
Types of Bonds in International Market

• Eurobond
• A Eurobond is a bond issued outside the country in whose currency it is
denominated
• Eurobonds are not regulated by the governments of the countries in which they
are sold
• Eurobonds are the most popular form of international bond
• A bond issued by a Japanese company, denominated in US dollars, and sold only
in the United Kingdom and France is an example of a Eurobond
Types of Bonds in International Market
• Global Bond
• A global bond is a bond that is sold simultaneously in several global
financial centres
• It is denominated in one currency, usually US dollars or Euros
• By offering the bond in several markets at the same time, the
company can reduce its issuing costs
• This option is usually reserved for higher rated, creditworthy and
typically very large firms
Other Bonds
• Dim sum bonds – bonds issued outside China but denominated in
Chinese renminbi. First issued in July 2007
• Panda bonds – Onshore renminbi-denominated debt issued in China
by overseas companies
• Yankee bond – bond denominated in US dollars that is publically
issued in the US by foreign banks and corporations
• Masala bonds – A rupee denominated bond issued by an Indian
entity in foreign markets
 International Bond Markets

• International Bond Markets are used because of attractive interest rates

India in International Bond Markets
• Indian government bond market is represented by Treasury Bills (T-
Bills), Government bonds, Special GoI securities and State
Development Loans (SDLs).
• State Governments also issue special securities under UDAY Scheme
to finance electricity distribution companies of India (DISCOMs).
• Special GoI securities are issued for recapitalizing of Public Sector
Banks (PSBs).
• The corporate sector is represented by Convertible Bonds, Non-
Convertible Debentures (NCDs), Perpetual, Zero Coupon Bonds,
Masala bonds, External Commercial Borrowings (ECBs) and Foreign
Currency Denominated Bonds (FCBs)
• Indian companies also issue Eurobonds, securitized debt instruments,
foreign bonds as well as quasi debt instruments like FCCBs (Foreign
Currency Convertible Bonds).
Foreign Bonds-interesting names
Yankee Bonds - Foreign Bonds sold in U.S.
Samurai Bonds -Foreign Bonds sold in Japan
Bulldog Bonds - Foreign Bonds sold in U.K
Rembrandt Bond - Foreign Bonds sold in Netherland.
Matador Bond- Foreign Bonds sold in Spain
Maple Bond -Foreign Bonds sold in Canada
Kangaroo Bond Foreign -Bonds sold in Australia

..
 MASALA BONDS
• Masala bonds are issued outside India but denominated in Indian Rupees,
rather than the local currency
• In case of dollar bonds the borrower takes the currency risk,
• In case of Masala bond the investors bear the risk
• The first Masala bond was issued by the World Bank backed IFC in November
2014 when it raised 1,000 crore bond to fund infrastructure projects in India
• In August 2015 International Financial Cooperation for the first time issued
green masala bonds and raised Rupees 3.15 Billion to be used for private sector
investments that address climate change in India.
• In July 2016 HDFC raised 3,000 crore rupees from Masala bonds and thereby
became the first Indian company to issue masala bonds
 EUROMARKETS
• Euromarkets are offshore capital markets
• Currency of denomination is not the official currency of the country where the
transaction takes place
• For example, a Malayan firm deposits USD not in the U.S. but with a bank
outside the U.S., for example in Singapore or in Switzerland
• This USD deposit outside the U.S. is called an Eurodeposit
• Euromarkets are well-developed, sophisticated markets where the traded
instruments are denominated in many currencies not just in the major
currencies
 EUROMARKETS
• Long before World War II banks outside the U.S. accepted deposits
denominated in U.S. dollars
• The volume of such deposits were small
• The cold war may have initiated the Eurocurrency market-Russia’s USD
deposits transferred to banks in London and other European centres
• Restrictions in the domestic market brought the Financial Institutions
to the EUROMARKET
 EUROMARKETS
• The first Euromarket to emerge was the market for short-term deposits
and loans, where banks acted as intermediaries between investors and
borrowers
• Several domestic instruments started to be priced taking the interest rate
on Eurodeposits as the relevant benchmark rate
• The market rate in these markets is usually the LIBOR, the London
Interbank Offer Rate
EUROMARKETS
• Example : A Eurodollar Transaction
• Suppose IBM has USD 1 million in excess cash available for a
week. IBM decides to invest this USD 1 million in a 7-day
deposit. Bank of New York pays 5.25% for a 7-day domestic
deposit. Banco Santander Central Hispano (BSCH) has a bid rate
of 5.50% for a 7-day Eurodollar time deposit. IBM deposits the
USD 1 million with Banco de Santander for 7 days.
• The transaction involves the following steps:
• BSCH must have a USD bank account with a U.S. bank, say, with
Citibank.
• IBM deposits USD 1 million with Citibank for credit to the
account of BSCH.
EUROMARKETS
• BSCH withdraws the funds from its account at Citibank
• In 7 days, BSCH transfers USD 1 million plus accrued interest through
its account at Citibank to the account designated by IBM
• Note that if Bank of New York had received the deposit, they should
have set aside a part of the deposit as reserve, as specified by the U.S.
Federal Reserve
• BSCH is free to loan the Eurodeposit to anyone, without any reserve
requirement
• The absence of reserve requirements lowers BSCH costs
Eurocurrency Markets

• The Eurocurrency markets originated in the 1950s when communist

governments in Eastern Europe became concerned that any deposits of
their dollars in US banks might be confiscated or blocked for political
reasons by the US government
• These communist governments addressed their concerns by depositing
their dollars into European banks, which were willing to maintain dollar
accounts for them
• This created what is known as the Eurodollar—US dollars deposited in
European banks
• Over the years, banks in other countries, including Japan and Canada, also
began to hold US dollar deposits and now Eurodollars are any dollar
deposits in a bank outside the United States
Eurocurrency Markets
• An extension of the Eurodollar is the Eurocurrency, which is a currency on
deposit outside its country of issue
• While Eurocurrencies can be in any denominations, almost half of world
deposits are in the form of Eurodollars
• The Euroloan market is a part of the Eurocurrency market where large
creditworthy borrowers including governments and large global firms
borrow
• Euroloans are quoted on the basis of LIBOR-the London Interbank Offer
Rate
• LIBOR is the interest rate at which banks in London charge each other for
short-term Eurocurrency loans
• The primary appeal of the Eurocurrency market is that there are no
regulations, which results in lower costs