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International Financial Management P G Apte

CHAPTER - 19. LONG TERM BORROWING IN THE GLOBAL FINANCIAL MARKETS. International Financial Management P G Apte. Introduction. Phenomenal changes have swept financial markets around the world during the 1980's and the 1990s

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International Financial Management P G Apte

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  1. CHAPTER - 19 LONG TERM BORROWING IN THE GLOBAL FINANCIAL MARKETS • International Financial Management • P G Apte

  2. Introduction • Phenomenal changes have swept financial markets around the world during the 1980's and the 1990s • Financial markets everywhere serve to facilitate transfer of resources from surplus units (savers) to deficit units (borrowers), the former attempting to maximise the return on their savings while the latter looking to minimise their borrowing costs • An efficient financial market thus achieves an optimal allocation of surplus funds between alternative uses and healthy financial markets also offer the savers a wide range of instruments enabling them to diversify their portfolios

  3. Introduction • Globalisation of financial markets during the eighties has been driven by two underlying forces • Growing (and continually shifting) imbalance between savings and investment within individual countries • Increasing preference on the part of investors for international diversification of their asset portfolios

  4. Introduction • Liberalisation and integration of financial markets • The markets themselves have proved to be highly innovative, responding rapidly to changing investor preferences and increasingly complex needs of the borrowers by designing new instruments and highly flexible risk management products • The combined result of these processes has been the emergence of a vast, seamless global financial market transcending national boundaries

  5. Introduction • It is by no means true that controls and government intervention have entirely disappeared • For developing countries, as far as debt finance is concerned, external bonds and syndicated credits are the two main sources of funds

  6. Legal Framework in India for Foreign Investment • In India the Legal framework for foreign investment in India is segregated primarily in two parts; one governs the investment in capital and the other borrowings. • The set of rules that govern the investment in capital is commonly called Foreign Direct Investment (FDI) Regulations. Whereas the set of rules that governs foreign investment in form of borrowings is called External Commercial Borrowing (ECB) Regulations. • Let us first have a closer look to what exactly falls under which set of rules. Foreign Direct Investment as the name suggests is the investment made towards core capital of an organization viz. investment in equity shares, convertible preference share and convertible debentures.

  7. Till late there was ambiguity about the partially convertible preference shares and debentures being considered as part of Foreign Direct Investment. • However in June 2007 the Reserve Bank of India has clarified as follows : • Only instruments which are fully and mandatorily convertible into equity within a specified time would be reckoned as part of equity under the FDI Policy and will be eligible to be issued to person’s resident outside India under the Foreign Direct Investment Scheme.

  8. Thus it is now crystal clear that the investment in non-convertible or partially convertible preference shares and debentures or any instrument with no definite period for conversion in equity will come under the purview of ECB Guidelines. • Moreover any investment as commercial loans [in the form of bank loans, buyers’ credit, suppliers’ credit, securitised instruments (e.g. floating rate notes and fixed rate bonds)] availed from non-resident lenders with minimum average maturity of 3 years will also come under the purview of ECB Guidelines.

  9. Deficits and External Financing - Developing & Emerging Market Economies ( $ Bill.) _________________________________________________ ITEM 2001 2002 2003 BALANCE ON CURRENT ACCOUNT 38 84 121 NET EXTERNAL FINANCING 148 160 254 NON-DEBT FLOWS 181 144 156 NET EXTERNAL BORROWING -33 16 98 (FROM OFFICIAL SOURCES) 33 10 19 (FROM PRIVATE SOURCES) -66 6 79

  10. CAPITAL FLOWS INTO INDIA

  11. Borrowing on International Capital Markets ($ Bill) 2007 2008 1 Syndicated Credit Facilities 2770 1682   Borrowers from (i) Developed Countries 2257 1304 (ii) Developing Countries 442 316  2 Debt Securities 2977 2436 (Net Issues)   Issuers from (i) Developed Countries 2763 2345 (ii) Developing Countries 155 28  2a Money Market Instruments* 199 82  2b Bonds and Notes 2778 2355

  12. Introduction • Indian entities began accessing external capital markets towards the end of seventies as gradually the amount of concessional assistance became inadequate to meet the increasing needs of the economy • The Indian authorities adopted a selective approach and permitted only a few select banks, all India financial institutions, and large public and private sector companies to access the market

  13. Foreign Portfolio Investment Flows Country Portfolio Inflows (US $ billion)   Price-Earnings 2001 2002 2003 Ratio (Per cent) Hong Kong -1.2 -0.9 -1.4 17.8 Chile 1.4 1.3 1.0 18.6 India 2.0 1.0 11.4 14.3 South Korea 12.2 4.9 14.2 14.6 Philippines 1.4 2.3 1.1 16.8 Thailand -0.6 -0.7 0.3 9.0 Note: 1. Data for China, Chile, Hong Kong and Philippines for 2003 are up to September and for Thailand up to June. 2. Data for price-earnings ratio are for end-March 2004. 3. Data for India relates to financial year.

  14. Till a few years ago, external commercial borrowings was the major source of non-governmental external funding. • By and large, India's borrowings have been by way of syndicated bank loans, buyers' credits and lines of credits • We will obtain an overview of the major segments of the global debt markets in terms of funding avenues, general regulatory framework, accessibility and some procedural aspects • Examine the analytics of the international financing decisions from the borrower's point of view and risk-return considerations from the investor's point of view

  15. India’s External Debt (Commercial) End March (USD Mio) Item 1999 2000 2001 2002 Commercial Bank Loans 20978 19943 24215 23338 Securitized Borrowings 10343 10094 9899 9971 Other 863 776 622 489 NRI&FC (B&O) Deposits 11794 13559 16568 17154 Export Credit 6789 6780 5923 5005 Total LT Debt 92612 94327 97504 95744 Total Debt 96886 98263 101132 98489

  16. FUNDS RAISED ON GLOBAL DEBT MARKETS (USD BILL) SYNDICATED BONDS&NOTES MONEY MARKET CREDITS NET ISSUES INST.(NET ISSUES) 2008 2009Q1 2008 2009Q1 2008 2009Q1 CHINA 18.4 8.0 1.9 ---- 0.4 -0.3 INDIA 21.1 2.5 1.0 -0.7 -0.1 ---- S.KOREA 16.2 2.9 0.6 3.0 -2.8 0.5 BRAZIL 15.0 1.5 -3.8 0.9 1.2 -0.5 MEXICO 12.3 1.5 -3.4 -2.2 0.1 -0.1

  17. The Major Funding Avenues • The funding avenues potentially open to a borrower in the global capital markets can be categorised as follows • Bonds : Foreign Bonds and Eurobonds • Straight Bonds • Floating Rate Notes (FRNs) • Zero-coupon and deep discount bonds • Bonds with a variety of option features embedded in them

  18. The Major Funding Avenues • Syndicated Credits • These are bank loans, usually at floating rate of interest, arranged by one or more lead managers (banks) with a number of other banks participating in the loan • Medium Term Notes (MTNs) • Initially conceived as instruments to fill the maturity gap between short-term money market instruments like commercial paper and long-term instruments like bonds, these subsequently evolved into very flexible borrowing instruments

  19. The Major Funding Avenues • Committed Underwritten Facilities • The basic structure under this is the Note Issuance Facility (NIF),these instruments were popular for a while before introduction of risk-based capital adequacy norms rendered them unattractive for banks • Money Market Instruments • These are short-term borrowing instruments and include commercial paper, certificates of deposit and bankers' acceptances among others

  20. The Major Funding Avenues • Another innovation to have emerged during the last decade or so is Project Finance and its novelty lies in the way the financing package is put together including the rights and obligations of the parties involved, allocation of various operating and financial risks to those who are best equipped to bear them, incorporation of various guarantees and so forth

  21. The Major Funding Avenues • Most of the funding instruments discussed above also have their "domestic" and "offshore" segments • Borrowers often access a currency-market segment which offers ease of access, cheaper all-in cost or some other attractive feature and then use swaps to reconfigure their liabilities in terms of currency and interest rate basis

  22. SIGNED SYNDICATED CREDIT FACILTIES ( US$ BILLION) BORROWERS FROM 2007 2008 2009 2009 Q1 Q2 ALL COUNTRIES 2770 1656 194.3 254.7 DEVELOPED 2257 1289 157.6 210.4 DEVELOPING 442 309 30.6 38.5 ASIA-PACIFIC 134 96 14.7 12.1 INDIA 36.0 20.4 3.3 5.0 CHINA 17.8 17.2 6.3 0.6 S.KOREA 31.6 14.7 2.1 2.5

  23. INTERNATIONAL DEBT SECURITIES ( ALL ISSUERS, NET ISSUES, US$ BILLION) ISSUERS FROM 2007 2008 2009 2009 Q1 Q2 ALL COUNTRIES 2977 2432 668 837 DEVELOPED 2764 2342 650 747 DEVELOPING 154 27 -4.7 22 ASIA-PACIFIC 42.5 8.2 0.3 10.1 INDIA 15.7 3.4 -1.5 0.8 CHINA 8.6 5.6 -1.4 0.4 S.KOREA 10.9 -3.0 3.2 11.7

  24. INTERNATIONAL DEBT SECURITIES ( CORPORATE ISSUES, US$ BILLION) ISSUERS FROM 2007 2008 2009Q1 ALL COUNTRIES 279 307 170.1 DEVELOPED 241 298 169.9 DEVELOPING 34 8.6 -0.9 ASIA-PACIFIC 9.9 -0.1 -0.8 INDIA 8.5 2.4 -0.4 CHINA 3.6 2.2 --- S.KOREA -0.8 0.9 0.9

  25. INTERNATIONAL MONEY MARKET INSTRUMENTS (NET ISSUES US$ BILL.EQUIVALENT) 2007 2008 2009Q1 TOTAL ISSUES 199 82 -71 COMMERCIAL PAPER 15 71 -32 CORPORATE ISSUERS -6.5 26.7 -8.6 FINANCIAL INSTITUTIONS 13.0 -31.7 -7.1 OTHER INSTRUMENTS 183.9 11.1 -38.9 CORPORATE ISSUERS -0.5 1.0 -0.5 FINANCIAL INSTITUTIONS 184.2 9.7 -37.3

  26. The Major Funding Avenues • Bond Markets • A bond is a debt security issued by the borrower, purchased by the investor, usually through the intermediation of a group of underwriters • Straight Bond • Callable Bond • Puttable bond • Sinking Fund Bond

  27. The Major Funding Avenues • FRN • Zero Coupon Bond • Convertible Bond • Warrants • A large number of other variants have been brought to the market • Yankee Bonds • Samurai Bonds and Shibosai Bonds • Shogun Bondsand Geisha Bonds

  28. The Major Bond Market Segments • Eurobonds : Unregistered, bearer Foreign Bonds : Non-resident issues in a country’s domestic capital market • Yankee Bonds : Public issues in US. Strict regulation • Private placements : Less strict regulation • Samurai Bonds : Public Issues in Japan • Shibosai Bonds,Shogun Bonds and Geisha Bonds Private placements in Japan Swiss and German Bonds : Public Issues and Private placements • Bulldog Bond : UK Public Issues • Rembrandt Bonds : Holland Public Issues

  29. INTERNATIONAL BONDS AND NOTES (NET ISSUES, US$ BILL.EQUIVALENT) 2007 2008 2009Q1 TOTAL ISSUES 2778.1 2354.6 740.4 FLOATING RATE 1129.8 1206.3 103.1 CORPORATE ISSUERS 23.6 ---- -4.4 FINANCIAL INSTITUTIONS 1110.0 1215.3 93.6 STRAIGHT FIXED RATE 1612.4 1140.5 644.0 CORPORATE ISSUERS 253.3 280.2 185.1 FINANCIAL INSTITUTIONS 1237.2 766.8 334.9 EQUITY RELATED 35.9 7.8 -6.7 CORPORATE ISSUERS 8.9 -0.4 -1.5 FINANCIAL INSTITUTIONS 27.3 8.3 -5.1

  30. Fig.A.19.3 The UK/European Three-tier Structure A TRADITIONAL SYNDICATE

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