International Financing and National Capital Markets

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Chapter 12

• International Financing and National Capital
  Markets

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I. CORPORATE SOURCES AND USES OF FUNDS

• I. CORPORATE SOURCES AND USES OF FUNDS
• A. 3 General Sources of Funds
• 1. Internally-generated cash
• 2. Short-term external funds
• 3. Long-term external funds
• B. Forms of Securities
• 1. Equity
• 2. Debt the most preferred form

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CORPORATE SOURCES AND USES OF FUNDS

• C. Debt Instruments Used
• 1. Commercial Bank Loans
• 2. Bonds
• a. Publicly issued
• b. Privately issued

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CORPORATE SOURCES AND USES OF FUNDS

• D. Financial Markets v. Financial Intermediaries
• 1. Securitization
• a. Definition
• replacing bank loans with
• securities issued in public
• markets.
• b. Reflects reduction in access costs due
  to
• 1.) Technological improvements
• 2.) Globalization

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CORPORATE SOURCES AND USES OF FUNDS

• E . Corporate Governance
• differences exist and fall into two general
  categories
• 1. Anglo-Saxon (AS) Model
• 2. Continental European and Japanese (CEJ)
  Model
• - example keiretsus

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The Sony KeiretsuA System of Interlocking
Directors
TRANSPORT CO
SUPPLIER NO.1
SUPPLIER NO.2
SONY
BANK NO. 2
BANK NO. 1
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CORPORATE SOURCES AND USES OF FUNDS

• F. Globalization of Financial Markets
• -has led to
• 1. Global center competition
• London v. NY v. Tokyo
• 2. Regulatory arbitrage

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II. NATIONAL CAPITAL MARKET AS INTERNATIONAL
CENTERS

• A. Principal Functions of Financial Centers
• 1. To transfer purchasing power
• 2. To allocate funds

between savers and borrowers
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NATIONAL CAPITAL MARKET AS INTERNATIONAL CENTERS

• B. International Financial Market
• 1. Most important
• a. London
• b. New York
• c. Tokyo
• 2. Other Centers for Intermediaries
• a. Singapore
• b. Hong Kong
• c. the Bahamas
• d. Dubai
• e. Shanghai

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NATIONAL CAPITAL MARKET AS INTERNATIONAL CENTERS

• 3. Prerequisites to be a global financial
  center
• a. political stability
• b. minimal government interventions
• c. legal infrastructure
• d. financial infrastructure

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NATIONAL CAPITAL MARKET AS INTERNATIONAL CENTERS

• C. Foreign Access to Domestic Markets
• 1. The Foreign Bond Market
• a. Extension of domestic market
• b. Issues floated by foreign cos. or
• governments
• Examples
• Yankee bonds, samurai bonds

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NATIONAL CAPITAL MARKET AS INTERNATIONAL CENTERS

• c. Three Major Types of Foreign Bonds
• 1.) Fixed rate
• 2.) Floating rate
• 3.) Equity related

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NATIONAL CAPITAL MARKET AS INTERNATIONAL CENTERS

• 2. The Foreign Bank Market
• a. Extension of domestic markets
• b. Important funding source
• Japanese banks for U.S. firms
• 3. The Foreign Equity Market
• a. Cross listing internationally can
• 1.) diversify risk
• 2.) increase potential demand
• 3.) build base of global owners.

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III. DEVELOPMENT BANKS

• A. General Purpose
• founded by governments to help finance
• very large infrastructure projects.

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DEVELOPMENT BANKS

• B. Types of Development Banks
• 1. World Bank Group includes
• a. International Bank for
  Reconstruction and Development
• b. International Development
  Association
• c. International Finance Corporation

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DEVELOPMENT BANKS

• B. Types of Development Banks (cont)
• 2. Regional Development Banks
• finance industry, agricultural, and
  infrastructure projects
• 3. National Development Banks
• concentrate on a particular industry or
  region.

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Project Finance

• Use for financing large-scale,
• long-term capital projects
• Most common form nonrecourse loans secured
  solely by the project and its cash flows.
• Ownership usually a single purpose corporation.

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Project Finance

• Key attributes
• economically separable nature of the investment
  project
• Recourse for lenders only to project assets and
  cash flows
• Underlying assets are large, illiquid industrial
  assets
• Finite project life

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Project Finance

• Creditworthiness
• depends solely on the projects cash flows
• protection against financial distress

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I. THE EUROCURRENCY MARKETS

• THE EUROMARKETS
• -the most obvious example of the globalization
  of financial markets
• A. The Eurocurrency Market
• 1. Composed of eurobanks who
  accept/maintain deposits of foreign
  currency
• 2. Dominant currency US

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THE EUROCURRENCY MARKETS

• B. Growth of Eurodollar Market
• caused by restrictive US government policies,
  especially
• 1. Reserve requirements on deposits
• 2. Special charges and taxes
• 3. Required concessionary loan rates
• 4. Interest rate ceilings (Regulation Q)
• 5. Rules which restrict bank competition.

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THE EUROCURRENCY MARKETS

• C. Eurodollar Creation involves
• 1. A chain of deposits
• 2. Changing control/usage of deposit

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THE EUROCURRENCY MARKETS

• 3. Eurocurrency loans
• a. Use London Interbank Offer Rate
  LIBOR as basic rate
• b. Six month rollovers
• c. Risk indicator size of margin
  between cost and rate charged.