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  3. Lecture International finance: An analytical approach (3/e): Chapter 15 - Imad A. Moosa

Lecture International finance: An analytical approach (3/e): Chapter 15 - Imad A. Moosa

Chapter 15 - International long-term financing and investment. In this chapter, the learning objectives are: To describe international bank loan financing, to demonstrate how the currency denominating a bond issue is chosen, to describe the primary and secondary international equity markets,… Chapter 15 International Long-Term Financing and Investment Objectives • To describe international bank loan financing • To demonstrate how the currency denominating a bond issue is chosen • To describe the

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  1. Chapter 15 International Long-Term Financing and Investment
  2. Objectives • To describe international bank loan financing • To demonstrate how the currency denominating a bond issue is chosen • To describe the primary and secondary international equity markets • To outline other means of international long-term financing (cont. Copyright 2010 McGraw-Hill Australia Pty Ltd ) PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 15-2
  3. Objectives (cont.) • To explain how choice is made between domestic and foreign securities as investment outlets • To consider the effect of taxation on the choice between domestic and foreign portfolio investments • To illustrate the effect of international portfolio diversification Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 15-3
  4. International bank loans • Foreign loans: raised by borrowers who are foreign to the country where the loans are raised • Euroloans: loans denominated in a currency other than the currency of the country where the loans are raised Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 15-4
  5. Syndicated loans • Syndicated loans (Euro or foreign) are so large that it becomes necessary to form a syndicate or a group of lending banks to finance the loans. The interest charged is a reference rate plus a spread Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 15-5
  6. The spread • The interest paid on syndicated loans is usually calculated by adding a spread to the London interbank offer rate (LIBOR) or another reference rate such as the US prime rate or the Singapore interbank offer rate (SIBOR) Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 15-6
  7. Determinants of the spread • Availability of funds • Creditworthiness of borrowers • Maturity • Fees Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 15-7
  8. Eurobonds • Eurobonds are placed (sold) in countries other than the country in whose currency the issue is denominated Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 15-8
  9. Foreign bonds • Foreign bonds are issued by borrowers who are foreign to the country where the bonds are placed • The bonds are denominated in the country’s currency Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 15-9
  10. Nicknames of foreign bonds • Yankee bonds (United States) • Samurai bonds (Japan) • Bulldogs (United Kingdom) • Matilda bonds (Australia) Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 15-10
  11. Reasons for the emergence of the Eurobond market • Absence of regulatory interference • Less stringent disclosure requirements • Favourable tax status Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 15-11
  12. Types of international bonds • Straight fixed-rate bonds • Floating rate notes • Convertible bonds • Bonds with equity warrants (cont. Copyright 2010 McGraw-Hill Australia Pty Ltd ) PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 15-12
  13. Types of international bonds (cont.) • Zero-coupon bonds • Multicurrency bonds • Global bonds • Novel bonds Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 15-13
  14. Choice of currency of denomination • Choose foreign bonds if: i S i Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 15-14
  15. International equity financing • Primary market functions: underwriting of new equity issues • Secondary market functions: trading of equities abroad Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 15-15
  16. Reasons for listing on foreign stock exchanges • To improve the liquidity of existing shares • To boost political and commercial visibility in foreign countries • To support a new equity issue • To broaden ownership Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 15-16
  17. Costs of foreign listing • One cost of foreign listing is greater disclosure requirements Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 15-17
  18. Selling shares in international markets • Private placements underwritten by institutions from the host country • Selling Euro-equity issues • Selling a subsidiary’s shares to foreign investors • Selling shares to a foreign firm to form an alliance Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 15-18
  19. Other sources of financing • Parallel loans: a parallel loan involves an initial exchange of funds between firms in different countries, such that the transaction is reversed some time in the future (cont. Copyright 2010 McGraw-Hill Australia Pty Ltd ) PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 15-19
  20. A parallel loan Loan Rio  Toyota’s Australia Tinto subsidiary (AUD funds) Loan + interest Loan Toyota Rio Tinto’s  Japan subsidiary (JPY funds) Loan + interest Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 15-20
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