Tuesday: Bank and Bond Financing
Connexion
loan
Cap des
Biches
Don
Pedro
Hydro
Westpac
Eurobonds
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
Cap des Biches:
Choices for the BCEAO
Foreign-exchange intervention
 Money-market intervention (consider
interaction with monetary policy)
 Fiscal policy--the demand side
 Tariffs and subsidies
 Exchange controls and capital controls
(and jawboning)

Copyright ©2003 Ian H. Giddy
Global Banking and Lending
Cap des Biches:
Choices for GTI-Dakar
“We must decide whether it’s worth covering our dollar
exposure, given the forward premium and relative
interest rates.”
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
Cap des Biches:
Choices for GTI-Dakar
“We must decide whether it’s worth covering our dollar
exposure, given the forward premium and relative
interest rates.”
What is the probability of a devaluation?
 How much?
 What should GTI-Dakar do?

Copyright ©2003 Ian H. Giddy
Global Banking and Lending
Cap des Biches:
Choices for GTI-Dakar
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Renegotiate the $30 million loan, replacing it with a loan
denominated in Euros
Keep the USD loan in place, but enter into a 6-year
currency swap to effectively convert GTI's payments into
Euros.
Hedge the dollar-Euro risk by buying dollars forward,
with rolling 3-month forward contracts
Hedge against a possible devaluation of the CFA franc,
by selling francs in the 3-month forward market.
Leave the dollar loan unhedged, and pass the cost of
any foreign exchange losses on to Senelac, the buyer of
GTI's power
Do nothing now but watch the situation carefully and
hedge if the risk becomes too great.
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
Global Banking:
Strategy & Techniques
Prof. Ian GIDDY
Stern School of Business
New York University
Products or Customers?
Corporate
Finance
Sales
Customer-Driven
Innovation
Capital
Markets
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
Client-Arena-Product Matrix
Markets covered
Clients served
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
Products
Credit products
 Trading and positioning
 Risk management products
 Financial engineering and structured
finance
 Underwriting and distribution
 Asset management
 Retail and private client services
 Transactions services

Copyright ©2003 Ian H. Giddy
Global Banking and Lending
Alternative Bank-Industry Linkages
The EquityMarket
System
The BankBased
System
The BankIndustrial
Crossholding
System
Individuals
Banks
Investment Vehicles
Industrial Companies
Individuals
Banks /
Investment Vehicles
Investment
Vehicles & Insurance
Industrial Companies
Individuals
Banks
Investment
Vehicles & Insurance
Industrial Companies
Industrial Companies
The Statecentered
System
Banks /
Investment Vehicles
Investment
Vehicles & Insurance
State Institutions
Industrial Companies
Copyright ©2003 Ian H. Giddy
Individuals
Industrial Companies
Global Banking and Lending
Product Profitability Cycle
Excess returns
Time
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
Client-Arena-Product Matrix
Build versus buy?
Markets covered
Clients served
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
Client-Arena-Product Matrix
Deutsche Bank in USA
Markets covered
Clients served
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
Client-Arena-Product Matrix
Sell?
Markets covered
Clients served
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
Complementarity and Cross-Selling
Insurance
Retail
Citigroup?
Wholesale
Asset Management
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
Client-Arena-Product Choices for West
Afrtican Banks?
?
Markets covered
Clients served
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
International Bank Financing
Prof. Ian Giddy
New York University
International Banking and Credit

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International Banking and the Eurocurrency
Market
The Separability of Pricing from Commitment
Periods
The Syndication Technique in International
Lending
Transferability and Trading of Loans
Note Issuance Facilities
Euro-commercial Paper
Floating-rate Notes
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
Interest-Rate Parity
$1 (1 + i E$) = ($1/ S t )(1 + iEBP) Fnt
where St is the spot exchange rate (dollars per British
Pound) and Fnt is the forward rate.
Or, to a close approximation,
(iE$ - iEBP) = [(Fnt - St)/St] (365/n) 100
Interest-rate differential = forward
premium or
discount
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
Asset-Liability Management
Assets
Loans


Copyright ©2003 Ian H. Giddy
Floating rate
Fixed rate
Liabilities
Deposits
 Short term
 Long term
Global Banking and Lending
Asset-Liability Management
Assets
Liabilities
Loans


Copyright ©2003 Ian H. Giddy
Floating rate
Fixed rate
“Bought money”
Global Banking and Lending
Asset-Liability Management
Assets
Loans


Copyright ©2003 Ian H. Giddy
Floating rate
Fixed rate
Liabilities
Active money
market trading
Global Banking and Lending
Loan Pricing: Basis and Margin
Assets
Loans

Copyright ©2003 Ian H. Giddy
Prime rate
Liabilities
Domestic
deposits
Global Banking and Lending
Loan Pricing: Basis and Margin
Assets
Prime rate
Domestic
deposits
Libor-based
Wholesale
deposits
Loans

Loans

Copyright ©2003 Ian H. Giddy
Liabilities
Global Banking and Lending
Transferability of Loans and OffBalance Sheet Banking
Th is a n no u nc em e nt a pp e ars as a ma tter o f ex am p le on ly
Au g us t 1 9 92
DANSKE DESIGN
Furniture Group
DM95,000,000
Multicurrency Term Loan
Arranged by
Northern Bank Group
Lead Manager
Bank of Copenhagen The Industrial Bank of Japan, Ltd
Kansallis-Osake-Pankki Scandinavian Bank Group Swiss Bank Corporation
Managers
Amsterdam-Rotterdam Bank N.V. BHF Bank
Crédit Lyonnais
Funds provided by
Amsterdam-Rotterdam Bank N.V. Banco Central S.A. Banco Herrero Banque du Midi
BHF Bank Crédit Lyonnais The Industrial Bank of Japan. Ltd The Irish Poets' Bank
Kansallis-Osake-Pankki Scandinavian Bank Group Swiss Bank Corporation
Agent Bank
Northern Bank Group
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
The Syndication Technique in
International Lending

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Syndication is the underwriting and distribution of large
bank loans, a distribution method adapted from the
securities underwriting business
Risk reduction in syndicated loans:
1. Credit analysis
2. Monitoring and control
3. Taking a smaller amount of more, diversified assets
4. Relying on the monitoring role of the lead bank or
banks.
Better information about
1. Aggregate amount of lending to any one borrower
(especially a country)
2. Terms and conditions of other segments of the loan
and of other lending to the same borrower.
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
Trading and Transferring Loans
ASSIGNMENT
PARTICIPATION
FULL ASSIGNMENT
PARTICIPATION
The sale of all of the originating
lender’s or assignor’s
rights and interest in a credit facility
to a purchaser or assignee.
Participants have derivative rights,
not direct rights against
(or obligations to) the borrower.
ASSIGNMENT
WITH NOVATION
Copyright ©2003 Ian H. Giddy



LIMITED VOTING PARTICIPATION
FULL VOTING PARTICIPATION
FULL PASS-THROUGH PARTICIPATION
Global Banking and Lending
Trading and Transferring Loans
ASSIGNMENT
PARTICIPATION
FULL ASSIGNMENT
PARTICIPATION
Participants have derivative rights,
The sale of all of the originating
not direct rights against
lender’s or assignor’s
(or obligations to) the borrower.
rights
in a credit facility
In aand
fullinterest
assignment:
a purchaser
assignee.
 toThe
borrower or
usually
acknowledges the assignment



The borrower must consent to release of obligation by the assignor
The assignee has direct access and enforcement of rights against the borrower
 LIMITED
VOTING
PARTICIPATION
The loan agreement and note is transferred
to assignee
at closing
ASSIGNMENT
WITH NOVATION
Copyright ©2003 Ian H. Giddy


FULL VOTING PARTICIPATION
FULL PASS-THROUGH PARTICIPATION
Global Banking and Lending
Trading and Transferring Loans
ASSIGNMENT
PARTICIPATION
FULL ASSIGNMENT
PARTICIPATION
Participants have derivative rights,
The sale of all of the originating
not direct rights against
lender’s or assignor’s
In a participation:
(or obligations to) the borrower.
rights and interest in a credit
facility
 The lead bank sells the right to participate in a credit facility or loan
to a purchaser or assignee.
 Participants have derivative rights,
not direct rights against (or obligations to) the borrower
 Counterparty risk exists for lead bank
 LIMITED
VOTING
PARTICIPATION
(eg lead bank responsible
for funding
participants’
shares)
ASSIGNMENT
 FULL
VOTING
 Capital rules may
affect lead
bank PARTICIPATION
WITH NOVATION
Copyright ©2003 Ian H. Giddy

FULL PASS-THROUGH PARTICIPATION
Global Banking and Lending
The Separability of Pricing from
Commitment Periods



The Eurocurrency market permits the separation
of the currency of denomination from the country
of jurisdiction.
A seemingly simple loan has inherent a large
number of different features and aspects of risk,
including
pricing (over short-term LIBOR)
commitment (medium term)
funding the loan
International bankers isolate these features in
order to distribute and to hedge the inherent risks
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
The International Money Markets
Source: ft.com
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
Pricing a Loan to BHP
What maturity and currency
do they want to borrow?
What is the credit quality
of this borrower?
USD
Get USD Libor as
cost-of-funds proxy
A-
Set an appropriate
spread over Libor
Price the loan
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
Pricing a Loan to BHP
USD
Get USD Libor as
cost-of-funds proxy
A-
Set an appropriate
spread over Libor
www.marketprices.ft.com/markets/currencies/money
Price the loan
pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ratings.htm
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
Funding the Australian Loan
Three ways to fund:
 Take
domestic Aussie dollar
deposit
 Take EuroA$ deposit
Copyright ©2003 Ian H. Giddy
3 MO
A$
DEP
3 MO
A$
DEP
Global Banking and Lending
Funding the Australian Loan
Three ways to fund:
 Take
domestic Aussie dollar
deposit
 Take EuroA$ deposit
 Fund with dollars, hedged
into Aussies
3 MO
E$
FX
DEP SWAP
3 MO
E$
FX
DEP SWAP
 Take
E$ deposit
 Do FX swap: sell USD spot,
buy USD forward
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
Raising the Money:
Note Issuance Facilities
A Note Issuance Facility has two tiers
 Tender panel members (who provide
funds)
 Underwriters (commit to the availability
of credit)
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
A Revolver
The Bigfoot Group
RUF Structure:
Arranger
Underwriting
banks
Tender
panel
Agent
£115,000,000
equivalent
Committed Revolving Facility
Arranged by
Credit Suisse First Boston Limited
Underwriting Banks
ABN-AMRO N.V. Banque Indosuez Crédit Lyonnais
Deutsche Bank Fuji International Finance Limited Banque Paribas
Samuel Montague & Co. Limited County Bank Kredietbank
Banque Bruxelles Lambert S.A. Citibank Crédit Suisse
Sumitomo Finance International Westdeutsche Landesbank Girozentrale
o Finance International Westdeutsche Landesbank
Tender Panel Members
ABN-AMRO N.V. Indosuez Crédit Lyonnais CIBC Limited
Deutsche Bank Fuji International Finance Limited Banque Paribas
LTCB International Limited J.P. Morgan County Bank Kredietbank
Banque Bruxelles Lambert S.A. Citibank Crédit Suisse Commerzbank
Merrill Lynch Capital Markets Sumitomo Finance International
Salomon Brothers International Westdeutsche Landesbank Girozentrale
Tender Panel and Facility Agent
Credit Suisse First Boston Limited
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
Laura Ashley
Need lots of money fast?
Have trouble accessing CP market?
Confident of always being able
to access the short-term market?
YES
Arrange syndicated
credit
YES
Arrange Euronote
program
NO
Don’t issue paper
YES
Borrow from banks
Arrange RUF or MOF:
Underwritten Euronote program
Need funds?
Cannot sell paper at L+10bp?
Issue Euronotes or other paper
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
Comparison of RUF to Put Option
Gain or loss relative
to having no
underwritten facility
+
"STRIKE PRICE"
Market spread relative
to LIBOR at which the
borrower can issue
short term paper.
FEES
0
-
LIBOR
FLAT
Borrower issues
Euronotes
Copyright ©2003 Ian H. Giddy
CAP
SPREAD
Borrower draws on
underwritten facility
Global Banking and Lending
Euro-commercial Paper


ECP is an unsecured promissory note, issued and
placed outside the jurisdiction of the currency of
denomination.
A Eurocommercial paper facility
 By
definition, the facility provides only for the best-efforts
auction of paper; the borrower has no underwritten
assurance of availability of funds
 Today, most committed facilities are used by those who
want a medium term back-up line on which they do not
intend to draw--often to back up a U.S. commercial paper
facility.
 Uncommitted Euro-commercial paper or U.S. commercial
paper facilities are used for actually raising funds.
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
International Bank Lending
DOMESTIC
LOANS
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
International Bank Lending
DOMESTIC
LOANS
EUROMARKET
LOANS
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
International Bank Lending
DOMESTIC
LOANS
EUROMARKET
LOANS
SYNDICATED
EUROCREDITS
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
International Bank Lending
DOMESTIC
LOANS
EUROMARKET
LOANS
SYNDICATED
EUROCREDITS
NOTE ISSUANCE
FACILITIES
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
International Bank Lending
DOMESTIC
LOANS
EUROMARKET
LOANS
SYNDICATED
EUROCREDITS
NOTE ISSUANCE
FACILITIES
EUROCOMMERCIAL
PAPER
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
Case Study: Connexion
Would you advise Connexion to use a
syndicated loan to finance its
prospective acquisition?
 If so, how would it be structured and
distributed?
 How should the bank evaluate and price
the risk?

Copyright ©2003 Ian H. Giddy
Global Banking and Lending
Connexion: Group Questions
1. From the perspective of Connexion, what are
their main objectives for this financing?
2. What would be the most appropriate product to
offer Connexion?
3&10. How was the financing structured?
4. What issues come to mind regarding pricing?
5. How are the banks protected against risks?
6. After the loan is done, what are the main
benefits to the bank, Soc Gen?
7. What are the benefits to the other banks?
8. What could go wrong?
9. Soc Gen: how much profit?
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
Tuesday: Bank and Bond Financing
Connexion
loan
Cap des
Biches
Don
Pedro
Hydro
Westpac
Eurobonds
Copyright ©2003 Ian H. Giddy
Global Banking and Lending
Copyright ©2003 Ian H. Giddy
Global Banking and Lending