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
The Global Bond Market 1
Tuesday: Bank and Bond Financing
Connexion
loan
Cap des
Biches
Don
Pedro
Hydro
Westpac
Eurobonds
Copyright ©2003 Ian H. Giddy
The Global Bond Market 2
The Global
Bond Market
Prof. Ian GIDDY
Stern School of Business
New York University
Case Study: Westpac Bond Financing
Why would Westpac issue a US dollar
Eurobond?
 Why has the bank issued other kinds of bonds?
 How would you explain the Eurobond issuance
process and costs to an issuer?
 What would be involved in getting a rating for
the company?

Copyright ©2003 Ian H. Giddy
The Global Bond Market 4
The International Capital Market
International bank financing
 Eurobonds, foreign bonds and global
bonds
 Project financing

Copyright ©2003 Ian H. Giddy
The Global Bond Market 5
Short-Term Financing: Evolution
DIRECT
COMMERCIAL PAPER
ENHANCED
INTERMEDIATED
Copyright ©2003 Ian H. Giddy
BANK L/Cs
BANK LOANS
The Global Bond Market 6
Alternative Sources of
Short-Term Financing
FINANCING
DOMESTIC
DEBT
EQUITY
LOANS
EUROMARKET
LOANS
SYNDICATED
EUROCREDITS
NOTE ISSUANCE
FACILITIES
EUROCOMMERCIAL
PAPER
Copyright ©2003 Ian H. Giddy
The Global Bond Market 7
Alternative Sources of
Long-Term Financing


Bank credits - syndicated
lending and facilities
Bonds
FINANCING
DEBT
EQUITY
Domestic,
foreign, Euro
Public, private
Structured, such as principle-indexed notes
Medium-term notes
 Asset-backed financing and leasing
 Project financing

Copyright ©2003 Ian H. Giddy
The Global Bond Market 8
Long-Term Financing: Evolution
DIRECT
ENHANCED
INTERMEDIATED
Copyright ©2003 Ian H. Giddy
PUBLIC BONDS
BANK-GUARANTEED BONDS
BANK TERM LOANS
The Global Bond Market 9
The Global Bond Market
Domestic bonds
 Foreign bond

(Issued within country of currency, by nonresident issuers)

Eurobonds
(Issued and sold in a jurisdiction outside the
country of the currency of denomination)

Global Bonds
(Issued in the domestic and the Eurobond
markets simultaneously)
Copyright ©2003 Ian H. Giddy
The Global Bond Market 10
The Global Bond Market
Domestic bonds
 Foreign bond

(Issued within country of currency, by nonresident issuers)

Eurobonds
(Issued and sold in a jurisdiction outside the
country of the currency of denomination)

Global Bonds
(Issued in the domestic and the Eurobond
markets simultaneously)
Copyright ©2003 Ian H. Giddy
The Global Bond Market 11
International Bond Markets are Linked

Issuers and investors compare terms in the
domestic and Eurobond markets, which are
linked across currencies via currency swaps
BOND
MARKETS
WITHIN
COUNTRY
OF
CURRENCY
BOND
MARKETS
OUTSIDE
COUNTRY
OF
CURRENCY
Domestic US
Domestic
Japanese
- Gov't
- Corporate
- Gov't
- Corporate
Foreign
Bonds
"Yankee"
Foreign
Bonds
"Samurai"
Currency
Swaps
Eurodollar
Bond Market
Euroyen
Bond Market
Long-dated
Forward
Exchange
Copyright ©2003 Ian H. Giddy
The Global Bond Market 12
Foreign Bonds


A foreign bond is a bond issued in a host
country's financial market, in the host country's
currency, by a foreign borrower
The three largest foreign bond markets are
Japan, Switzerland, and the U.S., representing
issuance of about $40 billion in bonds annually
Copyright ©2003 Ian H. Giddy
The Global Bond Market 13
Private Placements and Rule 144A
The private placement exemption from
registration and disclosure is extended to
Eurobonds as long as the U.S. investors meet
the following requirements:
 They
are large and sophisticated
 There are only a few investors
 They have access to information and analysis similar
to that which would ordinarily be contained in a
registered offering prospectus
 They are capable of sustaining the risk of losses,
and
 They intend to purchase the bonds for their own
investment portfolios, and not for resale.
Copyright ©2003 Ian H. Giddy
The Global Bond Market 14
Characteristics of Eurobonds
Issued outside country of currency
 Not subject to domestic registration or disclosure
requirements
 In most cases take form of private placements
 Placed through syndicates in many countries who sell
principally to nonresidents
 Bonds are structured so as to be free of withholding tax
 Bearer form
But...
 Eurobonds usually influenced de facto by government
and banks of country of currency

Copyright ©2003 Ian H. Giddy
The Global Bond Market 15
Pricing Bonds:
The Yield Curve
bondsonline.com
Copyright ©2003 Ian H. Giddy
The Global Bond Market 16
Benchmark Bonds
Copyright ©2003 Ian H. Giddy
The Global Bond Market 17
Corporate Bonds:
Spread over Benchmark
Copyright ©2003 Ian H. Giddy
The Global Bond Market 18
Bond Credit Ratings
Standard &
Moody’s Poor’s
Interpretation
Aaa
Aa
AAA
AA
High-quality debt instruments
A
Baa
A
BBB
Strong to adequate ability to
pay principal and interest
Ba
B
Caa
Ca
C
BB
B
CCC
CC
C
D
Ability to pay interest and
principal speculative
Copyright ©2003 Ian H. Giddy
In default
The Global Bond Market 19
Rating Criteria
Profitability





Copyright ©2003 Ian H. Giddy
Quality of
earnings
Ebitda
margins
Interest
coverage
indicators
Volatility of
earnings
Cost
Managemen
t
Capital
Structure



Indebtedness
ratios
Distribution of
debt
maturities
Effects of
concentrated
ownership on
funding
capabilities
Business Model




Barriers to
entry
Competitive
environment
Market
position
Diversificatio
n: Clients,
Products,
Geographic



Management
Management
Structure
Strategy and
Objectives
Performance
Record
The Global Bond Market 20
Rating Process
Issuer/Banker
Requests rating
List information requirements
Due diligence &
Meeting with management
Pool credit analysis
Legal analysis
Stress testing
Credit enhancement
negotiation
Deal documentation
Rating committee
Presale report
Final report
Surveillance
Copyright ©2003 Ian H. Giddy
The Global Bond Market 21
Ratings and Spreads
Corporate bond spreads: basis points over Treasury curve
Rating
1 year
2 year
3 year
5 year
7 year
Aaa/AAA
40
45
50
60
74
Aa1/AA+
45
55
60
70
84
Aa2/AA
55
60
65
75
89
Aa3/AA60
65
70
85
99
A1/A+
70
80
90
105
119
A2/A
80
90
105
120
140
A3/A90
100
110
130
150
Baa1/BBB+
105
115
128
145
165
Baa2/BBB
120
130
140
160
180
Baa3/BBB140
145
155
172
193
Ba1/BB+
225
250
275
300
325
Ba2/BB
250
275
300
325
350
Ba3/BB300
350
375
425
445
B1/B+
375
400
425
500
550
B2/B
450
500
550
625
670
B3/B500
550
650
750
875
Caa/CCC
600
650
800
900
1025
10 year
85
95
105
117
142
157
176
186
201
210
350
385
460
610
710
975
1150
30 year
96
106
116
136
159
179
196
208
221
232
440
540
665
765
890
1075
1300
Source: bondsonline.com
Copyright ©2003 Ian H. Giddy
The Global Bond Market 22
Protection Against Default: Examples
Collateral
 Covenants
 Subordination of future debt
 Dividend restrictions
 Sinking funds

Copyright ©2003 Ian H. Giddy
The Global Bond Market 23
Global Bonds
Copyright ©2003 Ian H. Giddy
The Global Bond Market 24
Key Dates in the Issuance of a Eurobond
Issuance need or
opportunity identified
Issuer
discusses
deal with
lead
manager
Announcement of
Eurobond issue
Syndicate
formed,
bonds
"presold"
prior to
final terms
Offering day:
Eurobond issued
Final
terms,
bonds sold
by selling
group to
investors
Copyright ©2003 Ian H. Giddy
Closing day:
Eurobonds delivered,
Issuer gets money
The Global Bond Market 25
Issuing a Bond: Key Players in the
Issuance of a Eurobond
SELLING
GROUP
Copyright ©2003 Ian H. Giddy
UNDERWRITERS
MANAGERS
The Global Bond Market 26
Underwriting Economics
Underwriting
Fee
20%
Management
Fee
20%
Underwriting Fee:
Based on
underwriting
commitment (often
less expenses of
offering)
Management Fee:
Normally shared
equally among
managers (may be
subject to a
praecipium for
Global Coordinator
or Lead Manager)
Selling
Concession
60%
Copyright ©2003 Ian H. Giddy
Selling Concession:
Payable as a
percentage of
allocation
(determined by
book-runner)
The Global Bond Market 27
Pricing and Fees
The Issuer
The Business
 Telecoms
 Dot-Coms
 Avons
(How much volatility?)
Copyright ©2003 Ian H. Giddy
Fees
Pricing
Debt
0.15%
to
1.5%
T+Spread
L+Spread
Equity
5% to
7%
Comparables/Ratios
The market
Future cash flow
valuation
The Global Bond Market 28
Case Study: Westpac Bond Financing
Why would Westpac issue a US dollar
Eurobond?
 Why has the bank issued other kinds of
bonds?
 How would you explain the Eurobond
issuance process and costs to an issuer?
 What would be involved in getting a rating
for the company?

Copyright ©2003 Ian H. Giddy
The Global Bond Market 29
Westpac Bond Financing Goals
1.
2.
3.
4.
Diversification
- Currency
- Retail and wholesale markets
- Debt product types and maturity term
- Debt investor types and location
Flexibility
Reduce cost and volatility
Global debt presence and performance
Copyright ©2003 Ian H. Giddy
The Global Bond Market 30
Westpac Ratings
For senior unsecured debt obligations Westpac has been assigned
the following credit ratings:
Duration
Short term
Long Term
Outlook
Fitch Ratings
F-1+
AA-
Stable
Moody's
Investors
Service&
Standard
Poor's
P-1
Aa3
Stable
A-1+
AA-
Stable
Copyright ©2003 Ian H. Giddy
The Global Bond Market 31
Westpac Bond Financing
A$350m 10yr callable subordinated notes
 A$600m 5.5% 3 yr notes to Japanese
investors
 USD $500m 5.75% 5yr Eurodollar AA
notes
 GBP300m GBP Libor+0.10% 5-yr floating
rate note
 Eur500m Euribor+0.10% 5-yr FRN

Copyright ©2003 Ian H. Giddy
The Global Bond Market 32
Copyright ©2003 Ian H. Giddy
The Global Bond Market 33