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Connexion loan

Tuesday: Bank and Bond Financing. Connexion loan. Cap des Biches. Don Pedro Hydro. Westpac Eurobonds. Cap des Biches: Choices for the BCEAO. Foreign-exchange intervention Money-market intervention (consider interaction with monetary policy) Fiscal policy--the demand side

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Connexion loan

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  1. Tuesday: Bank and Bond Financing Connexion loan Cap des Biches Don Pedro Hydro Westpac Eurobonds

  2. Cap des Biches:Choices for the BCEAO • Foreign-exchange intervention • Money-market intervention (consider interaction with monetary policy) • Fiscal policy--the demand side • Tariffs and subsidies • Exchange controls and capital controls (and jawboning)

  3. Cap des Biches:Choices for GTI-Dakar “We must decide whether it’s worth covering our dollar exposure, given the forward premium and relative interest rates.”

  4. Cap des Biches:Choices for GTI-Dakar “We must decide whether it’s worth covering our dollar exposure, given the forward premium and relative interest rates.” What is the probability of a devaluation? How much? What should GTI-Dakar do?

  5. Cap des Biches:Choices for GTI-Dakar Renegotiate the $30 million loan, replacing it with a loan denominated in Euros Keep the USD loan in place, but enter into a 6-year currency swap to effectively convert GTI's payments into Euros. Hedge the dollar-Euro risk by buying dollars forward, with rolling 3-month forward contracts Hedge against a possible devaluation of the CFA franc, by selling francs in the 3-month forward market. Leave the dollar loan unhedged, and pass the cost of any foreign exchange losses on to Senelac, the buyer of GTI's power Do nothing now but watch the situation carefully and hedge if the risk becomes too great.

  6. Global Banking:Strategy & Techniques Prof. Ian GIDDY Stern School of Business New York University

  7. Products or Customers? Sales Corporate Finance Customer-Driven Innovation Capital Markets

  8. Client-Arena-Product Matrix Products offered Markets covered Clients served

  9. Products • Credit products • Trading and positioning • Risk management products • Financial engineering and structured finance • Underwriting and distribution • Asset management • Retail and private client services • Transactions services

  10. Alternative Bank-Industry Linkages Individuals The Equity-Market System Banks Investment Vehicles Industrial Companies Individuals The Bank-Based System Banks / Investment Vehicles Industrial Companies Individuals Investment Vehicles & Insurance Investment Vehicles & Insurance The Bank-IndustrialCrossholding System Banks Industrial Companies Industrial Companies Individuals Banks / Investment Vehicles Investment Vehicles & Insurance The State-centered System State Institutions Industrial Companies Industrial Companies

  11. Product Profitability Cycle Excess returns Time

  12. Client-Arena-Product Matrix Build versus buy? Products offered Markets covered Clients served

  13. Client-Arena-Product Matrix Deutsche Bank in USA Products offered Markets covered Clients served

  14. Client-Arena-Product Matrix Sell? Products offered Markets covered Clients served

  15. Complementarity and Cross-Selling Insurance Retail Wholesale Citigroup? Asset Management

  16. Client-Arena-Product Choices for West Afrtican Banks? ? Products offered Markets covered Clients served

  17. International Bank Financing Prof. Ian Giddy New York University

  18. International Banking and Credit • International Banking and the Eurocurrency Market • The Separability of Pricing from Commitment Periods • The Syndication Technique in International Lending • Transferability and Trading of Loans • Note Issuance Facilities • Euro-commercial Paper • Floating-rate Notes

  19. Interest-Rate Parity $1 (1 + i E$) = ($1/ S t )(1 + iEBP)Fnt where St is the spot exchange rate (dollars per British Pound) and Fnt is the forward rate. Or, to a close approximation, (iE$ - iEBP) = [(Fnt - St)/St] (365/n) 100 Interest-rate differential = forward premium or discount

  20. Asset-Liability Management Assets Liabilities Loans • Floating rate • Fixed rate Deposits • Short term • Long term

  21. Asset-Liability Management Assets Liabilities Loans • Floating rate • Fixed rate “Bought money”

  22. Asset-Liability Management Assets Liabilities Loans • Floating rate • Fixed rate Active money market trading

  23. Loan Pricing: Basis and Margin Assets Liabilities Loans • Prime rate Domestic deposits

  24. Loan Pricing: Basis and Margin Assets Liabilities Loans • Prime rate Domestic deposits Loans • Libor-based Wholesale deposits

  25. Transferability of Loans and Off-Balance Sheet Banking

  26. The Syndication Technique in International Lending • Syndication is the underwriting and distribution of large bank loans, a distribution method adapted from the securities underwriting business • Risk reduction in syndicated loans: 1. Credit analysis 2. Monitoring and control 3. Taking a smaller amount of more, diversified assets 4. Relying on the monitoring role of the lead bank or banks. • Better information about 1. Aggregate amount of lending to any one borrower (especially a country) 2. Terms and conditions of other segments of the loan and of other lending to the same borrower.

  27. Trading and Transferring Loans ASSIGNMENT PARTICIPATION FULL ASSIGNMENT The sale of all of the originating lender’s or assignor’s rights and interest in a credit facility to a purchaser or assignee. PARTICIPATION Participants have derivative rights, notdirect rights against (or obligations to) theborrower. ASSIGNMENT WITH NOVATION LIMITED VOTING PARTICIPATION FULL VOTING PARTICIPATION FULL PASS-THROUGH PARTICIPATION

  28. Trading and Transferring Loans ASSIGNMENT PARTICIPATION FULL ASSIGNMENT The sale of all of the originating lender’s or assignor’s rights and interest in a credit facility to a purchaser or assignee. PARTICIPATION Participants have derivative rights, notdirect rights against (or obligations to) theborrower. In a full assignment: • The borrower usually acknowledges the assignment • The borrower must consent to release of obligation by the assignor • The assignee has direct access and enforcement of rights against the borrower • The loan agreement and note is transferred to assignee at closing ASSIGNMENT WITH NOVATION LIMITED VOTING PARTICIPATION FULL VOTING PARTICIPATION FULL PASS-THROUGH PARTICIPATION

  29. Trading and Transferring Loans ASSIGNMENT PARTICIPATION FULL ASSIGNMENT The sale of all of the originating lender’s or assignor’s rights and interest in a credit facility to a purchaser or assignee. PARTICIPATION Participants have derivative rights, notdirect rights against (or obligations to) theborrower. In a participation: • The lead bank sells the right to participate in a credit facility or loan • Participants have derivative rights, not direct rights against (or obligations to) the borrower • Counterparty risk exists for lead bank (eg lead bank responsible for funding participants’ shares) • Capital rules may affect lead bank ASSIGNMENT WITH NOVATION LIMITED VOTING PARTICIPATION FULL VOTING PARTICIPATION FULL PASS-THROUGH PARTICIPATION

  30. The Separability of Pricing from Commitment Periods • The Eurocurrency market permits the separation of the currency of denomination from the country of jurisdiction. • A seemingly simple loan has inherent a large number of different features and aspects of risk, including • pricing (over short-term LIBOR) • commitment (medium term) • funding the loan • International bankers isolate these features in order to distribute and to hedge the inherent risks

  31. The International Money Markets Source: ft.com

  32. Pricing a Loan to BHP What maturity and currency do they want to borrow? Get USD Libor as cost-of-funds proxy USD What is the credit quality of this borrower? Set an appropriate spread over Libor A- Price the loan

  33. Pricing a Loan to BHP Get USD Libor as cost-of-funds proxy USD Set an appropriate spread over Libor A- www.marketprices.ft.com/markets/currencies/money Price the loan pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ratings.htm

  34. Funding the Australian Loan Three ways to fund: • Take domestic Aussie dollar deposit • Take EuroA$ deposit 3 MO A$ DEP 3 MO A$ DEP

  35. Funding the Australian Loan Three ways to fund: • Take domestic Aussie dollar deposit • Take EuroA$ deposit • Fund with dollars, hedged into Aussies • Take E$ deposit • Do FX swap: sell USD spot, buy USD forward 3 MO E$ DEP FX SWAP 3 MO E$ DEP FX SWAP

  36. Raising the Money:Note Issuance Facilities A Note Issuance Facility has two tiers • Tender panel members (who provide funds) • Underwriters (commit to the availability of credit)

  37. A Revolver RUF Structure: • Arranger • Underwriting banks • Tender panel • Agent

  38. Laura Ashley Need lots of money fast? Have trouble accessing CP market? Arrange syndicated credit YES Confident of always being able to access the short-term market? Arrange Euronote program YES Arrange RUF or MOF: Underwritten Euronote program Need funds? Don’t issue paper NO Cannot sell paper at L+10bp? Borrow from banks YES Issue Euronotes or other paper

  39. Comparison of RUF to Put Option Gain or loss relative to having no underwritten facility + "STRIKE PRICE" Market spread relative to LIBOR at which the borrower can issue short term paper. FEES 0 - LIBOR CAP FLAT SPREAD Borrower issues Borrower draws on Euronotes underwritten facility

  40. Euro-commercial Paper • ECP is an unsecured promissory note, issued and placed outside the jurisdiction of the currency of denomination. • A Eurocommercial paper facility • By definition, the facility provides only for the best-efforts auction of paper; the borrower has no underwritten assurance of availability of funds • Today, most committed facilities are used by those who want a medium term back-up line on which they do not intend to draw--often to back up a U.S. commercial paper facility. • Uncommitted Euro-commercial paper or U.S. commercial paper facilities are used for actually raising funds.

  41. International Bank Lending DOMESTIC LOANS

  42. International Bank Lending DOMESTIC LOANS EUROMARKET LOANS

  43. International Bank Lending DOMESTIC LOANS EUROMARKET LOANS SYNDICATED EUROCREDITS

  44. International Bank Lending DOMESTIC LOANS EUROMARKET LOANS SYNDICATED EUROCREDITS NOTE ISSUANCE FACILITIES

  45. International Bank Lending DOMESTIC LOANS EUROMARKET LOANS SYNDICATED EUROCREDITS NOTE ISSUANCE FACILITIES EUROCOMMERCIAL PAPER

  46. Case Study: Connexion • Would you advise Connexion to use a syndicated loan to finance its prospective acquisition? • If so, how would it be structured and distributed? • How should the bank evaluate and price the risk?

  47. Connexion: Group Questions 1. From the perspective of Connexion, what are their main objectives for this financing?  2. What would be the most appropriate product to offer Connexion?  3&10. How was the financing structured?  4. What issues come to mind regarding pricing?  5. How are the banks protected against risks?  6. After the loan is done, what are the main benefits to the bank, Soc Gen?  7. What are the benefits to the other banks?  8. What could go wrong? 9. Soc Gen: how much profit?

  48. Tuesday: Bank and Bond Financing Connexion loan Cap des Biches Don Pedro Hydro Westpac Eurobonds

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