International Debt Markets
(or part II of chapter 13)
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Agenda
 What is Eurocurrency?
 International debt market instruments:
• Bank loans & Syndicated Credits.
• Euro-note Market Instruments.
• International Bond Market Instruments.
 Project financing.
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Eurocurrency Markets
 Eurocurrencies: domestic currencies of one country on deposit in
2nd country.
• Pros: flexible maturities & higher yields & gov’t regulation-free.
• E.g.: Eurosterling, Euroeuro,Euroyen, Eurodollar.
 Eurodollar deposits =/= demand deposits!
• Can’t transfer by check.
• Underlying balance kept @ US correspondent bank.
 History: why Eurocurrency market so popular?
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Eastern-Europe holders post-WW2 deposited US$ funds in London.
Central banks kept reserves in Eurodollar deposits.
1957: Bank of England imposed tight controls on sterling lending.
1960s: US BOP problems segmented US debt market.
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International Debt Markets
Bank Loans &
Syndications
(floating-rate,
short-to-medium term)
Euronote
Market
(floating-rate,
short-to-medium term)
International
Bond Market
(fixed & floating-rate,
medium-to-long term)
International Bank Loans.
Eurocredits.
Syndicated Credits.
Euronotes.
Eurocommercial Paper (ECP).
Euro Medium Term Notes (EMTN).
Eurobond.
- straight fixed-rate issue.
- floating-rate note (FRN).
- equity-related issue.
Foreign Bond: Yankee, Samurai.
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Bank Loans & Syndicated Credits
 Eurocredits
• Loans denominated in eurocurrencies & extended by banks in
countries other than country of denominating currency.
• Tied to LIBOR.
• Short-term maturities: ~ 6 months.
• Narrow spreads, usually less than 100 basis points.
 Syndicated credits
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Arranged by lead bank w/ other banks participation.
Interest expense tied to LIBOR.
Upfront fee.
Commitment fee (on unused portion).
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Euronote Market
 Medium- & short- term debt instruments.
 Two types
– Underwritten facilities.
– Non-underwritten facilities: Euro-commercial paper (ECP) &
Euro Medium-term notes (EMTN)
 Euronote
• Short-term, negotiable promissory notes in eurocurrency.
• E.g.: Revolving Underwriting Facility & Note Issuance Facility.
• Cheaper than syndicated loans. Why?
 Euro-commercial paper (ECP)
– Maturities of 1,3, & 6 months.
 Euro Medium-term notes (EMTN)
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Maturities: 9 months to 10 years.
Allows continuous issuance.
Coupons paid on set calendar dates.
Issued in small chucks ($2-5m).
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International Bond Market
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World bond market 50% larger than world equity market.
Bonds currencies 2001: US$ (49%), Euro (37%) & Yen (5%).
Popular: no regulatory interference, lax disclosure, tax anonymity.
Bond types:
• Eurobonds
– Sold to investors in national capital markets other than country of
denominating currency.
– E.g. Evian (France) issues $-denominated bonds in UK & Japan.
– Types:
– Straight Fixed-rate issue.
– Floating rate note (FRN).
– Equity related issue – convertible bond.
• Foreign bonds
– Sold w/in country of denominated currency, however issuer is from
another country.
– E.g. Air Portugal offers bond in US priced in $.
– Include: Yankee bonds (sold in US), Samurai bonds (Japan), & Bulldogs
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(UK).
Currencies to denominate bonds?
(in US$ billions)
2000
2001
US$
791.8
1,131.9
Euro
581.7
841.9
Yen
128.7
125.3
Other currencies
201.2
207.5
Source: BIS Quarterly Review, December 2002
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Types of Eurobonds issued?
(in US$ billions)
2000
2001
Floating rate
518.2
643.6
1,128.7
1,590.7
56.5
72.2
Fixed rate
Equity-related
Source: BIS Quarterly Review, December 2002
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Eurobonds
 Straight Fixed Rate Debt
• “Plain vanilla” bond w/ specified coupon & maturity.
• Most Eurobonds are bearer bonds => coupon dates annual.Why?
• Vast majority (65+%) of new international bond offerings are
straight fixed-rate.
 Floating Rate Notes (FRN)
• Like adjustable rate mortgage.
• Allows shifting interest rate risk to borrower.
• Reference rates are 3- & 6-month US$ LIBOR.
 Equity-Related Bonds
• Convertibles
– Allow exchange bond for shares in issuer’s firm.
– Sell @ lower coupon rate of interest. Why?
• Bonds w/ equity warrants
– Allow holder keep bond & buy shares in issuer’s firm @ specified
price.
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Eurobond Credit Ratings
 Main providers: Moody’s, Fitch, Standard & Poor’s.
• Moody’s: nine categories from Aaa to C.
• Investment grade ratings: Aaa  Baa.
 Focus on default risk, not exchange rate risk.
 Default rate is higher for foreign currency debt than
local currency debt.
 Inflation is key factor.
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US Regulation on Int’l Bonds
 Eurobonds: US citizen cannot buy them in US
primary market => U.S. citizen could buy on
secondary market.
 Yankee bonds: Yankee bonds sold to US citizens are
registered.
 Bearer vs. Registered: No registration for bearer
bonds. => Investor anonymity. Opens door for tax
evasion…
 Tax Concerns: until 1984, US had 30% withholding
tax on interest to nonresident holder of US T-bonds.
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Project Financing
 Financing arrangement for long-term, large-scale
capital projects, generally w/ high risk.
 Used by MNE in development of infrastructure
projects in emerging markets
 Projects highly leveraged (60+% debt). Why?
• Scale of project precludes single equity investor.
• Many projects funded by governments.
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Project Financing Characteristics
 Separation of project from its investors
– Project legally & financially separate.
– Allows project to obtain own credit rating & cash flows.
 Long-lived & capital intensive
 Cash flow predictability from third-party
commitments
– Third party commitments are usually suppliers or
customers of project
 Finite projects with finite lives
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Things to remember…
 What is Eurocurrency?
 International debt market instruments:
• Bank loans & Syndicated Credits.
• Euro-note Market Instruments.
• International Bond Market Instruments.
 Project financing.
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