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Chapter 12

Chapter 12. International Financing and National Capital Markets. 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

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Chapter 12

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  1. Chapter 12 International Financing and National Capital Markets

  2. 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

  3. CORPORATE SOURCES AND USES OF FUNDS • C. Debt Instruments Used • 1. Commercial Bank Loans • 2. Bonds • a. Publicly issued • b. Privately issued

  4. 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

  5. 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

  6. The Sony Keiretsu:A System of Interlocking Directors TRANSPORT CO SUPPLIER NO.1 SUPPLIER NO.2 SONY BANK NO. 2 BANK NO. 1

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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

  12. NATIONAL CAPITAL MARKET AS INTERNATIONAL CENTERS • c. Three Major Types of Foreign Bonds • 1.) Fixed rate • 2.) Floating rate • 3.) Equity related

  13. 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.

  14. III. DEVELOPMENT BANKS • A. General Purpose • founded by governments to help finance • very large infrastructure projects.

  15. 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

  16. DEVELOPMENT BANKS • B. Types of Development Banks (con’t) • 2. Regional Development Banks • finance industry, agricultural, and infrastructure projects • 3. National Development Banks • concentrate on a particular industry or region.

  17. 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.

  18. 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

  19. Project Finance • Creditworthiness: • depends solely on the project’s cash flows • protection against financial distress

  20. 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$

  21. 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.

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

  23. 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.

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