Multinational Finance Chap 12 13 Alan Saphiro

National Capital Marketand

International Financing

DipowirawanDwi Pambudi S.

Rozeru Mario

CORPORATE SOURCES AND USES OF FUNDS

• Secara umum pendanaan perusahaan bersumber dari :

Internally-generated cash

Short-term external funds

Long-term external funds

Forms of Securities

- Equity

- Debt

Securities


Debt Instruments Used

1. Commercial Bank Loans

2. Bonds

a. Publicly issued

b. Privately issued


Financial Markets V.S. Financial IntermediariesSecuritizationReplacing bank loans with securities issued in public

markets. Reflects reduction in access costs due to- Technological improvements- Globalization


Financial Systems and Corporate Governance

Terdapat perbedaan tata kelola perusahaan, secara umum tata kelola perusahaan di dunia dibedakan menjadi :

1. Anglo-Saxon (AS) Model

2. Continental European and Japanese (CEJ)

Jepang mengenal Keiretsu

SONY

SUPPLIER NO.1

BANKNO. 1

TRANSPORTCO

BANKNO. 2

SUPPLIERNO.2


• Globalization of Financial Markets

Globalization of Financial Markets

Perkembangan teknologi dan komunikasi

Penurunan cost untuk mengakses financial market

Deregulasi Keuangan

Penghilangan perbedaan domestic financial market

dengan financial market asing


• Globalization of Financial Marketshas led to- Global center competition:

London v. New York v. Tokyo- Regulatory arbitrage

NATIONAL CAPITAL MARKET AS INTERNATIONAL FINANCIAL MARKET

Principal Functions of Financial Centers- To transfer purchasing power- To allocate funds

Consequences of well-functioning financial market:- More and better projects get financed- Managers are compelled to run companies- The rate of innovation is higher- Individuals are able to select their preferred time pattern

of consumption.


International Financial Market- Most Important : London, Tokyo, New York- Others : Singapore, Hong Kong, Luxembourg,

Switzerland- Requirement to be a global financial center :

- Political stability- Minimal government interventions- Legal infrastructure- Financial infrastructure


Foreign Access to Domestic MarketThe Foreign Bond Market

a. Extension of domestic market

b. Issues floated by foreign companies or governments

Examples:

Yankee bonds, samurai bonds

Three Major Types of Foreign Bonds- Fixed rate- Floating rate - Equity related (Convertible bonds & Equity Warrants)


Foreign Access to Domestic MarketThe Foreign Bank Market

a. Extension of domestic markets

b. Important funding source: Japanese banks for U.S. firms

The Foreign Equity MarketCross listing internationally can- Diversify risk- Increase potential demand- Build base of global owners

DEVELOPMENT BANKS

General PurposeFounded by governments to help finance very large

infrastructure projects

Types of Development Banks

World Bank Group includes

a. International Bank for Reconstruction and Development

b. International Development Association

c. International Finance Corporation

Regional Development Banks

Finance industry, agricultural, and infrastructure projects

National Development Banks

Concentrate on a particular industry or region.

FUNCTION OF EUROMARKET

DipowirawanDwi Pambudi S.

Rozeru Mario

The Eurocurrency Market

Eurocurrency : Dollar or other freely convertible currency deposited in a bank outside its origin country

Composed of eurobanks who accept/maintain deposits of foreign currency

Dominant currency: US$


Growth of Eurodollar Market

Caused by restrictive US government policies, especially- Reserve requirements on deposits- Special charges and taxes- Required concessionary loan rates- Interest rate ceilings- Rules which restrict bank competition.

Eurodollar Creation involves1. A chain of deposits2. Changing control/usage of deposit


Eurocurrency Loans- Use London Interbank Offer Rate: LIBOR as basic rate

- Six month rollovers

- Risk indicator: size of margin between cost and rate charged.

Multicurrency Clauses- Clause gives borrower option to switch currency of loan at

rollover- Reduces exchange rate risk


Relationship Between Domestic and Eurocurrency Money Market

-Closely linked rates by arbitrage-Euro rates: tend to lower lending, higher deposit

EUROBONDS

Definition : bonds sold outside the country of currency denomination

-A financial instrument which gives 2 parties the right to exchange streams of income over time-Recent Substantial Market Growth due to use of swaps

EUROBONDSLinks to Domestic Bond Markets:

Arbitrage has eliminated interest rate differential

Placement

Underwritten by syndicates of banksCurrency Denomination

Most often US$ (75%)Retirement

Using sinking fund usually. some carry call provisionsRatings

According to relative risk; Rating Agencies : Moody’s and Standard & Poor

Rationale For Market ExistenceEurobonds avoid government regulation

EUROBONDS

Eurobond vs. Eurocurrency LoansFive Differences- Eurocurrency loans use variable rates- Loans have shorter maturities- Bonds have greater volume- Loans have greater flexibility- Loans obtained faster

NOTE ISSUANCE FACILITIES AND EURONOTES

Note Issuance Facility (NIF)- Low-cost substitute for loan- Allows borrowers to issue own notes- Placed/distributed by banks

NIFs vs. Eurobonds

Differences:- Notes draw down credit as needed- Notes let owners determine timing- Notes must be held to maturity

EURO-COMMERCIAL PAPER

Euronotes and Euro-Commercial Paper

Euronotes unsecured short-term debt securities denominated in US$ and issued by corporations and governments.

Euro-commercial paper(CP)

Euronotes not bank underwritten

EURO-COMMERCIAL PAPER

U.S. vs. Euro-CPs- Average maturity longer (2x)

for Euro-CPs- Secondary market for Euro; not U.S. CPs.- Smaller fraction of Euro use credit rating

services to rate.

Multinational Finance Chap 12 13 Alan Saphiro

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