《Euromarkets.doc》由会员分享，可在线阅读，更多相关《Euromarkets.doc（6页珍藏版）》请在三一办公上搜索。
1、EuromarketsThese can broadly be classified as Eurocurrency and Eurobond markets. We want to focus on how MNCs can use these international markets to meet their financing requirements.A. Eurocurrency marketDefinition and backgroundThe Eurocurrency market consists of banks (called Eurobanks) that acce
2、pt deposits and make loans in foreign currencies. A Eurocurrency is a freely convertible currency deposited in a bank located in a country which is not the native country of the currency. The deposit can be placed in a foreign bank or in the foreign branch of a domestic US bank. Note of caution! The
3、 prefix Euro has little or nothing to do with the newly emerging currency in Europe.In the Eurocurrency market, investors hold short-term claims on commercial banks which intermediate to transform these deposits into long-term claims on final borrowers.The Eurocurrency market is dominated by US $ or
4、 the Eurodollar. Occasionally, during weak dollar periods (latter part of 1970s and 1980s), the EuroSwiss franc and the EuroDM markets increased in importance. The Eurodollar market originated post WWII in France and England thanks to the fear of Soviet Bloc countries that dollar deposits held in th
5、e US may be attached by US citizens with claims against communist governments!Thriving on government regulationBy using Euromarkets, banks and financiers are able to circumvent / avoid certain regulatory costs and restrictions. Some examples are:a) Reserve requirementsb) Requirement to pay FDIC fees
6、c) Rules or regulations that restrict competition among banksContinuing government regulations and taxes provide opportunities to engage in Eurocurrency transactions. However, ongoing erosion of domestic regulations have rendered the cost and return differentials much less significant than before. A
7、s a result, the domestic money market and Eurocurrency markets are closely integrated for most major currencies, effectively creating a single worldwide money market for each participating currency.Illustration IGerman firm sells medical equipment to institutional buyer in the US. It receives a US$
8、check drawn on Citicorp, NY. Initially this check is deposited in a checking account for dollar working capital use. But to earn a higher return (or rate of interest) on the $ 1 million the German firm decides to place the funds in a time deposit with a bank in London, UK. One million Eurodollars ha
9、ve thus been created by substituting a dollar account in a London bank for the dollar account held in NY. Notice that no US $ left NY but ownership of the US deposit has moved from a foreign corporation to a foreign bank. The London bank would not like to leave the funds idle in NY account. If a gov
10、ernment or commercial borrower is unavailable, the London bank will place the $ 1 million in the London interbank market. The interest rate at which such interbank loans are made is called the London interbank offer rate (LIBOR).-This example demonstrates that the Eurocurrency market is a chain of d
11、eposits and a chain of borrowers and lenders. The majority of Eurocurrency transactions involve transferring control of deposits from one Eurobank to another Eurobank. Loans to non-Eurobank borrowers account for less than half of all Eurocurrency loans.The Eurocurrency market operates like any other
12、 financial market, but for the absence of government regulations on loans that can be made and interest rates that can be charged.Eurocurrency loansEurocurrency loans are made on a floating rate basis.Interest rates on loans to governments, corporations and nonprime banks are set at a fixed margin a
13、bove LIBOR for a given period and currency.ExampleIf the margin is 75 basis points (b.p.) and the current LIBOR is 6%, the borrower is charged 6.75% for the relevant period. LIBOR is the underlying variable rate of interest, usually set for a 6 month period.-The margin or spread between the lending
14、banks cost of funds and the interest charged by the borrower is based on the borrowers perceived creditworthiness / riskiness. The spreads can range from 15 b.p. to more than 300 b.p., the median of the range varying from 100 to 200 b.p.The maturity of the Eurocurrency loan can range from 3 to 10 ye
15、ars. Eurocurrency loans are made by bank syndicates. The bank originating the loan becomes the lead bank managing the syndicate, inviting one or two other banks to be co-managers of the loan. The borrower is charged a one-time syndication fee ranging from 0.25 % to 2 % of the loan value according to
16、 the size and type of the Eurocurrency loan.The drawdown period over which the borrower may use the loan of the loan and the repayment period vary in accordance with the borrowers needs. A commitment fee of about 0.5 % per annum is paid on the unused balance, and prepayments in advance of the agreed
17、 upon schedule are permitted but are sometimes subject to a penalty fee.i) EAC of Eurocurrency loanA corporate borrower has arranged a DM 500 million, five-year EuroDM loan with a bank syndicate led by two managing banks. The upfront syndication fee is 2 %.Net proceeds to the borrower = $ 500 mn 0.0
18、2 (US $ 500 mn) = DM 490 mn.The interest rate on the EuroDM loan is LIBOR + 1.75 %, with LIBOR reset every 6 months. If the initial LIBOR6 rate for DM is 6 %, the first semiannual debt service payment is:(0.06 + 0.0175) / 2 * DM 500 mn = DM 19.3750 mnTherefore the borrowers effective annual rate (EA
19、C) for the first six months is:DM 19.3750 mn / DM 490 mn * 2 * 100 = 7.9082 %This EAC changes in every reset period (in this case 6 months) with LIBOR6.ii) Multicurrency loansThough most Eurocurrency loans are Eurodollar loans, these often come with a multicurrency clause. This clause gives the borr
20、ower the right (subject to availability) to switch from one currency to another on any rollover (or reset) date. This option allows the borrower to match currencies with cash inflows and outflows (which is an effective way of managing exposure to currency risk, and thus an effective risk-management
21、technique). The option also allows borrowers to take advantage of its own expectations regarding currency changes and search for funds with the lowest effective cost.iii) Interest ratesInterest rates in national and Eurocurrency markets are closely linked through arbitrage.US $ credit marketsSterlin
22、g credit marketsUS lending rateUK lending rateEurodollar lending rateEurosterling lending rateEurodollar deposit rateEurosterling deposit rateUS deposit rateUK deposit rateThe difference between the Euro$ deposit rate and the Eurosterling deposit rate is given by the forward discount or premium (whi
23、ch approximates the expected change in the dollar/pound exchange rate).B. Eurobond marketsEurobonds are bonds sold outside the country whose currency they are dominated in. They are similar in many ways to public debt sold in domestic capital markets. However, the Eurobond market is entirely free of
24、 official regulation and is self-regulated by the Association of International Bond Dealers.Borrowers in the Eurobond market are typically well known and have impeccable credit ratings (for example, developed countries, international institutions, and large MNCs). The Eurobond market has grown rapid
25、ly in the last two decades, and it exceeds the Eurocurrency market in size.i)Currency denominationAbout 75 % of Eurobonds are dollar denominated. The most important nondollar currencies for Eurobond issues are DM and FF (now rapidly replaced by the euro), the JY and the BP The Swiss central bank ban
26、 has led to the absence of SF Eurobonds.ii)Fixed rate EurobondsFixed-rate Eurobonds pay coupons once a year, unlike the semiannual coupon, domestic bonds in the US market. Borrowers compare the all-in cost, that is, the effective interest rate, on Eurobonds and domestic bonds.This interest rate is c
27、alculated as the discount rate that equates the present value of the future interest and principal payments to the net proceeds received by the issuer, or as the IRR of the bond.iii) Comparing Eurobond issue with a US domestic issueTo compare a Eurobond issue with a US domestic issue, therefore, the
28、 all-in cost of funds on an annual basis must be converted to a semiannual basis or vice versa. Thus,Semiannual yield = 1 + Annual yield0.5 1, and(1)Annual yield = 1 + Semiannual yield2 1.(2)Illustration IIP & G plans to issue a 5-year bond with a face value of $ 100 million. Its investment banker e
29、stimates that a Eurobond issue would have to bear a 7.5 % coupon and that fees and other expenses will total $ 738,000 providing net proceeds to P & G of $ 99,262,000.Exhibit 1 shows the cashflows associated with the Eurobond issue. The all-in cost (IRR) of this issue, which is an annual rate, is sh
30、own as 7.68 %. As a cross check, the third column shows that the PV of the cashflows, using a discount rate of 7.68 %, sum to P & G s net proceeds of $ 99,262,000.Alternatively, P & G can issue a $ 100 million, 5-year bond in the US market with a coupon of 7.4 %. With estimated issuance costs of $ 9
31、74,000, P & G will receive net proceeds of $ 99,026,000.Exhibit 2 shows the cashflows associated with this issue and its all-in cost (IRR) of 3.82 %. Note that the cashflows are semiannual, as is the all-in cost. Again, the third column does a cross-check to confirm the 3.82 % all-in cost.According
32、to Equation (1) above, the equivalent semiannual all-in cost for the Eurobond issue is (1.0768)0.5 1 = 3.77 %. Thus, the all-in cost of the Eurobond is lower, making it preferable if all other terms and conditions on the two bonds are the same.Alternatively, using Equation (2) above, we can convert
33、the US bond yield to its annual equivalent and compare that figure to the Eurobond yield of 7.68 %. This computation would have yielded an annualized all-in cost of the US bond issue equal to (1.0382)2 1 = 7.78 %. As before, the Eurobnd issue is preferable because its all-in cost is 10 basis points lower.
