The Global Capital Market
Prof. Ian Giddy
New York University
The International Capital Market
International bank financing
 Eurobonds, foreign bonds and global
bonds
 “A Day in the Life”

The
secondary market
The primary market

Structured financing
Copyright ©1996 Ian H. Giddy
The Global capital Market 2
Short-Term Financing: Evolution
DIRECT
COMMERCIAL PAPER
ENHANCED
INTERMEDIATED
Copyright ©1996 Ian H. Giddy
BANK L/Cs
BANK LOANS
The Global capital Market 3
Alternative Sources of
Short-Term Financing
FINANCING
DOMESTIC
DEBT
EQUITY
LOANS
EUROMARKET
LOANS
SYNDICATED
EUROCREDITS
NOTE ISSUANCE
FACILITIES
EUROCOMMERCIAL
PAPER
Copyright ©1996 Ian H. Giddy
The Global capital Market 8
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 ©1996 Ian H. Giddy
The Global capital Market 9
RUF Stuff
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 ©1996 Ian H. Giddy
The Global capital Market 10
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 ©1996 Ian H. Giddy
The Global capital Market 11
Long-Term Financing: Evolution
DIRECT
ENHANCED
INTERMEDIATED
Copyright ©1996 Ian H. Giddy
PUBLIC BONDS
BANK-GUARANTEED BONDS
BANK TERM LOANS
The Global capital Market 12
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 ©1996 Ian H. Giddy
The Global capital Market 13
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 ©1996 Ian H. Giddy
The Global capital Market 14
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 ©1996 Ian H. Giddy
The Global capital Market 15
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 ©1996 Ian H. Giddy
The Global capital Market 16
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 ©1996 Ian H. Giddy
The Global capital Market 17
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 ©1996 Ian H. Giddy
The Global capital Market 18
Global Bonds
Copyright ©1996 Ian H. Giddy
The Global capital Market 19
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 ©1996 Ian H. Giddy
Closing day:
Eurobonds delivered,
Issuer gets money
The Global capital Market 20
Key Players in the Issuance of a
Eurobond
SELLING
GROUP
Copyright ©1996 Ian H. Giddy
UNDERWRITERS
MANAGERS
The Global capital Market 21
Who Gets What
Fees, percent Fees, amount Net price
Price paid by investor (in theory)
Price paid by member of selling group
Price paid by member
of underwriting group
Price paid by managers
(plus "praecipium" paid to lead manager)
Copyright ©1996 Ian H. Giddy
60%
0.90
101.50
100.60
60%+20%
0.90+0.30
100.30
60%+20%+20%
0.90+0.30+0.30
100.00
The Global capital Market 22
Pricing Eurobonds in the Secondary
Market




What "spread to Treasury" should it yield
relative to similar bonds--credit risk, duration
and liquidity--trading in the secondary market?
Use the desired yield to maturity to find its
present value at the next coupon date.
Find today's present value of that amount,
including the coupon to be paid
Actual price is quoted as "clean price," meaning
not counting accrued interest
Copyright ©1996 Ian H. Giddy
The Global capital Market 23
The Eurobond Secondary Market
Copyright ©1996 Ian H. Giddy
The Global capital Market 24
Eurobond Secondary Market
Quotations

Examine the straight bonds listed
What
determines the yields?
The bid-offer spreads?
Does this differ by currency?
Can you explain the pricing
of the floating rate notes?

Copyright ©1996 Ian H. Giddy
The Global capital Market 25
A Day in the Life
of the Eurobond Market

Examine the deals
Why
were each done in that particular form?
What determines the pricing?

Can you break the hybrids into their
component parts?
Copyright ©1996 Ian H. Giddy
The Global capital Market 26
A Day in the Life...
NEW I NTER NA TIONAL BO ND ISSUES
Bo
Bo rrrrowe
owerr
Am
Amou
ou nt
nt m
m ..
C
Cou
ou pon
pon %
%
PPrric
icee
M
Maatt ur
urity
ity
FFee
eess
Boo
Boo kk rruu nn
nn er
er
C elwor ks Trust 1990-1¶ (b)
US $250
9 1/4
99.80
1998
1 7/8- 1 5/8
C re dit Suisse
M ar ui Cor p*
US $500
(4 3/ 8)
100
1995
2 1/4- 1 1/2
Nom ur a
Holder bank ( a)
US $150
9 3/4
101
1994
1 3/8- 1
Battle M ountaingold 
US $100
7 1/2
100
2006
2 1/2- 1 1/2
M er rill Lynch
SN CF
F F r750
9 1/4
98.55
1997
1 7/8- 1 1/4
CCF
Viennische Sta dtsba nk (a)
L100bn
13
101 3/8
1994
1 3/8- 7/8
BN L
Eur ofim a (a )
P ta10bn
12 5/8
101 1/8
1996
1 5/8- 1
Ir ish Bldg Soc .(a )
¥15bn
7.4
101 5/8
1995
1 5/8- 1 1/8
Bank of M ontreal(c )
¥2.8bn
7 1/4
101 1/8
1993
1 1/8- 5/8
C SF B
De utsc he Bank
IB J
Nippon C re dit
¶ F inal te rm s. *With equity war r ants. P rivate plac em ent. C onvertible. (a) Non-c allable. ( b) C allable at par af ter 5 year s. I f c all not
exe rcise d, bond pays 50bp over Libor in last year . (c) Rede mption linked to Nikkei stock index .
Copyright ©1996 Ian H. Giddy
The Global capital Market 27
Asset-Backed Eurobonds
Legal risk:
Legal
structure: sale of assets to separate
subsidiary that issued ABS.
Default risk:
Overcollateralization
dictated by rating
agencies
Replenishment of collateral
Third-party garantees.
Prepayment risk:
Early
Copyright ©1996 Ian H. Giddy
redemption caused by “spread trigger”.
The Global capital Market 28
Equity-Linked Eurobonds

Eurobonds with warrants
Marui

Convertible Eurobonds
Battle

Mountaingold
Index-linked Eurobonds
Bank
Copyright ©1996 Ian H. Giddy
of Montreal
The Global capital Market 29
Equity Financing Choices
Warrants
Convertibles
Equity
ADRs
Copyright ©1996 Ian H. Giddy
Common
The Global capital Market 30
Values and Market Premium
V
a
l
u
e
o
f
C
o
n
v
e
r
t
i
b
l
e
Conversion
Value
Market
Value
Market Premium
Straight
Bond Value
B
o
n
d
($) 0
Price Per Share of Common Stock
Copyright ©1996 Ian H. Giddy
The Global capital Market 31
Copyright 1994, HarperCollins Publishers
Values and Warrant Premium
V
a
l
u
e
o
f
W
a
r
r
a
n
t
Market
Value
Market Premium
Theoretical
Value
($)
0
Copyright ©1996 Ian H. Giddy
Price Per Share of Common Stock ($)
The Global capital Market 32
“Hybrid” Features
of A Bond Issue
 Conversion
Feature - compound
option
 Warrants - two instruments
 Index-linked bonds
 Call Feature
Bond
value = straight bond value - call value
These are all example of hybrid bonds and
should be priced by decomposition
Copyright ©1996 Ian H. Giddy
The Global capital Market 33
International Equity Markets and
Portfolio Diversification



No well-accepted international version of the capital
asset pricing model.
The benefits of diversification globally are empirical
issues.
The empirical case for international diversification has
two components.



Establish the riskiness of foreign investment, and the extent to
which combining a foreign with a domestic portfolio reduces
risk.
Even if it reduces risk, does foreign investment also reduce
expected return?
Then what we have to do is make sure we understand
how international diversification is best achieved.
Copyright ©1996 Ian H. Giddy
The Global capital Market 34
Portfolio Return and Risk
Portfolio return:
E( R p ) =
n
 w i E( Ri )
i=1
where wi are the weights of each asset in the portfolio.
(Expected return is simply the weighted sum of the
individual asset returns.)
Portfolio variance:

2
P
=
n
n
  w i w j  i  j  ij
i=1 j=1
When i = j, the term wiwjFiFjDij becomes wi2Fi2.
Copyright ©1996 Ian H. Giddy
The Global capital Market 35
The Minimum-Variance Frontier of
Risky Assets
E(r)
Efficient frontier
Individual
assets
Global minimumvariance portfolio

Copyright ©1996 Ian H. Giddy
The Global capital Market 36
Optimal Overall Portfolio
E(r)
Indifference
curve
CAL
P
Opportunity
set
Optimal complete
portfolio

Copyright ©1996 Ian H. Giddy
The Global capital Market 37
The Global Efficient Frontier
AVERAGE RETURN
% PA
30
STOCKS
AND
BONDS
STOCKS
ONLY
25
20
15
EAFE STOCKS
EAFE
STOCKS
& BONDS
10
WORLD STOCKS
WORLD STOCKS & BONDS
US STOCKS
US STOCKS & BONDS
US BONDS
RISK, % PA
5
5
Copyright ©1996 Ian H. Giddy
10
15
20
25
30
The Global capital Market 38
Evidence Suggests Index Funds are
Not for the International Investor



For the international investor the capitalizationweighted portfolio may not be the optimal one.
The reason is market segmentation. The world
stock market is not efficient yet, the evidence
suggests, at least not in the "mean-variance
efficiency" sense that is required by the CAPM.
Because of real exchange risk (deviations from
PPP), what is the optimal portfolio for an
investor in one country may not be the optimal
portfolio for an investor in another, even if there
were a single risk-free asset acceptable to both.
Studies confirm these propositions
Copyright ©1996 Ian H. Giddy
The Global capital Market 39
International Portfolio Optimization:
Passive vs Active Portfolios
(Let the proportions of all possible assets vary until the
optimal proportions are found.)
RETURN
The results of
0.23
letting the
0.22
100% Japan
0.21
computer
0.2
Minimum risk
0.19
find the best
portfolio
Market capitalization
0.18
weighted portfolio
proportions for 0.17
various levels 0.16
0.15
of return:
0.14
Same risk as 100% USA,
but higher return
0.13
0.12
100% USA portfolio
0.11
0.1
0.05
Copyright ©1996 Ian H. Giddy
0.1
0.15
0.2
0.25
0.3
0.35
RISK
(STANDARD
DEVIATION)
The Global
capital Market 40
Obstacles to International Investment
Might Include:
Information barriers.
 Political and capital control risks.
 Foreign exchange risks.
 Restrictions on foreign investment and
control.
 Taxation.
 Higher costs.

Copyright ©1996 Ian H. Giddy
The Global capital Market 41
Conclusion:
The international equity market is
imperfect
 Hence there may be advantages to
international equity issuance
 How should companies achieve this?

Copyright ©1996 Ian H. Giddy
The Global capital Market 42
Financing with
Structured Securities
Prof. Ian Giddy
New York University
Principles of Innovation Through
Financial Engineering



Bundling and unbundling basic instruments
Exploiting market imperfections (sometimes
temporary)
Creating value added for investor and issuer
by tailoring securities to their particular
needs
Key: For the innovation to work, it must
provide value added to both issuer and
investor.
Copyright ©1996 Ian H. Giddy
The Global capital Market 44
Anatomy of a Deal
Issuer:
Looking
for large amounts of floating-rate
USD and DEM funding for its loan porfolio.
Wants low-cost funds: target CP-.10
Is not too concerned about specific timing
of issue, amount or maturity
Is willing to consider hybrid structures.
Copyright ©1996 Ian H. Giddy
The Global capital Market 46
Anatomy of a Deal
Investor:
Has
distinctive preference for high grade
investments
Looking for investments that will improve
portfolio returns relative to relevant indexes
Invests in both floating rate and fixed rate
sterling and dollar securities
Can buy options to hedge portfolio but
cannot sell options
Copyright ©1996 Ian H. Giddy
The Global capital Market 47
Anatomy of a Deal
Intermediary:
Has
experience and technical and legal
background in structure finance
Has active swap and option trading and
positioning capabilities
Has clients looking for caps and other forms
of interest rate protection.
Copyright ©1996 Ian H. Giddy
The Global capital Market 48
The Deal
1 Initiate medium term note programme for the
borrower, allowing for a variety of currencies,
maturities and special structures
2 Structuring a MTN in such a way as to meet the
investor’s needs and constraints
3 Line up all potential counterparties and
negociate numbers acceptable to all sides
4 Upon issuer’s and investor’s approval, place
the securities
Copyright ©1996 Ian H. Giddy
The Global capital Market 49
The Deal / 2
5 For the issuer, swap and strip the issue into the
form of funding that he requires
6 Offer a degree of liquidity to the issuer by
standing willing to buy back the securities at a
later date.
Copyright ©1996 Ian H. Giddy
The Global capital Market 50
The Issue








Issuer: Deutsche Bank AG
Amount: US$ 40 Million
Coupon:
First three years: semi-annual
LIBOR + 3/8% p.a., paid semi-annually
Last 5 years: 8.35%
Price: 100
Maturity: February 10, 2000
Call: Issuer may redeem the notes in full at par on
February 10, 1995
Fees: 30 bp
Arranger: Credit Swiss First Boston
Copyright ©1996 Ian H. Giddy
The Global capital Market 51
The Deal in Detail
DEUTSCHE
Deutsche sells 3-year
floating rate note paying
LIBOR - 3/8%
SCOTTISH
LIFE
For an additional 3/4% p.a.,
Deutsche buys threeFor 1% p.a.,
year put option on 5-year
Deutsche sells
CSFB a swaption fixed-rate 8.35% note to
SL in 3 years
(the right to pay
fixed 8.35% for 5
years in 3 years)
CSFB
Copyright ©1996 Ian H. Giddy
CSFB sells the swaption to a
corporate client seeking to
hedge its funding cost
against a rate rise
CLIENT
The Global capital Market 56
What’s Really Going On?
Note:


Issuer has agreed to pay an above-market rate
on both the floating rate note and the fixed rate
bond segment of the issue
FRN portion: .75 % above normal cost
Fixed portion: .50% above normal cost
Issuer has in effect purchased the right to pay a
fixed rate of 8.35% on a five-year bond to be
issued in three years time.
Copyright ©1996 Ian H. Giddy
The Global capital Market 57
Motivations for Issuing Hybrids Bonds
Company has a view
 There are constraints on what the
company can issue
 The company can arbitrage to save
money
 Always ask: given my goal, is there an
alternative way of achieving the same
effect (e.g., using derivatives?)

Copyright ©1996 Ian H. Giddy
The Global capital Market 58
The International Capital Market
International bank financing
 Eurobonds, foreign bonds and global
bonds
 “A Day in the Life”

The
secondary market
The primary market

Structured financing
Copyright ©1996 Ian H. Giddy
The Global capital Market 59