International Finance
• Fundamental Principles of lending to MNCs
• Learning Objectives:
• The students will be able to learn and understand:
1. The concept of lending
2. Principles of lending
Introduction
• One of the traditional function of a banker is
accepting of deposits from customers
• Banks use this funds in the capacity of a
lender to satisfy the borrowing requirements
of other customers
• Now banks also use borrowed funds for
lending to a preferred sector like exports
General Principles Of Lending
• Ability: to manage financial affairs along with other
areas of management
• Margin: it is the contribution of the borrower towards
the project costs. It reflects the financial commitment.
• Purpose: the purpose for which the amount has been
borrowed
• The safety of repayment: it includes terms of payment,
repayment, arrangement, control and security. The
importance given by the business to the bank
General Principles of Lending
• Amount: this will depend upon following factors:
1. Term and repayment schedule
2. Adequacy of amount
3. Repayment
4. Monitoring and control
- Principles of Bank Lending - Good Document
- http://allbankingalerts.com/important-principles-of-lending-in-banking-principles-of-
credit/
Monitoring of Lending
• Documentation is required for most types of
international banking facilities to define the
following:
1. The liabilities to be undertaken by the bank and
remuneration to be paid for assuming the
liabilities
2. The method of operation of the facility
3. The undertakings to be given by the borrower
4. Events which will cause the facility to cease
5. Details of any security agreed
Control Of Lending
• The ability to control arises from insertion of
provisions in the documents.
• Provision regarding understanding on the basis of
which loan has been made
• Provisions whereby the company agree to do or not
to do certain things
• In case of breach of provisions the term facility may
be converted into on demand loan
Critical Provisions
1. Representation and Warranties:
Representations and warranties are a very important clause and, due to the repercussions of
misrepresentation, the borrower must ensure prior to entering into a loan agreement that any representations
and warranties in the loan agreement are true and, if they are to be repeated, will remain true.
2. Covenants (Promise) and events of default:
• Examples of covenants:
a) Negative pledge: the borrower undertakes not to pledge its assets as
security for any other borrowing.
b) Restriction on asset sales: not to sell material portion of its assets either
without the consent of the lenders or at below market value
Critical Provisions
• Examples of covenants:
c) Cross default: it states that it is an event of default
under this agreement if the borrower defaults in
performance of someone else’s agreement.
d) Pari- Passu Clause: the borrower undertakes not
to create any debt which, on liquidation will rank
for payment ahead of the bank
Critical Provisions
• Examples of covenants:
e) Continuing Ownership: it protects against a
change in ownership by providing the right to
renegotiate or demand repayment if a change
in control of the borrower or a merger occurs.
Critical Provisions
• Ratio Covenants: it is designed to convert a term
loan into an on the demand facility if the financial
condition of the borrower deteriorates materially.
• Examples of Ratio covenants:
1. Debt Service Ratio: the borrower undertakes that
profit after tax and after adjusting for all material
non cash items will exceed a specified percentage
of term debt within one year
Critical Provisions
• Examples of ratio covenants:
2. Minimum Tangible Net Worth ( MTNW):
the borrower undertakes to minimum level of
tangible net worth.
Critical Provisions
3. Maximum Gearing: the borrower undertakes
that its total borrowing will not exceed a
specified proportion of its tangible net worth.
4. Minimum Liquidity: the borrower undertakes
to maintain a certain level of working capital
either expressed as ratio or monetary amount
by which current assets would exceed current
liabilities
Critical Provisions
5. Interest Cover: the borrower undertakes that
aggregate of pre tax profits plus interest paid will not
fall below for example 1.25 times interest paid.
6. Dividend Cover: he undertakes that the aggregate of
retained profits plus dividends paid for any given
period will not fall below eg 2 times dividend paid.
7. Security Maintenance: can ask for additional
security.
• International Credit Rating
Agency
International Credit Rating Agency
• Learning Objectives:
• The students will be able to learn and
understand:
1. The concept of credit rating
2. The concept of global capital market
Introduction
• The rating agencies have been in the business of
rating since the middle of 19th century.
• Few years back reasons to extend credit were
based upon the close personal relationship
between the borrower and lender.
• Credit rating helps potential investors to get the
borrower’s overall picture, its strength and
weakness.
What is Rating?
• Credit rating is an independent assessment of the
creditworthiness of a bond(note or any security
of indebtedness) by a credit rating agency.
• It measures the probability of the timely
repayment of principal and interest of a bond.
• A higher credit rating would lead to a more
favorable effect on the marketability of a bond
What is Rating?
• The rating does not mean that the rating
agency has performed an audit nor does it
attest the authenticity of the information
which the issuer has provided.
• Ratings can be changed, suspended or
withdrawn as a result of changes in or
unavailability of information
Credit Rating
• It is an independent assessment of the creditworthiness
of Bond, security by credit rating agency.
• It measures the probability of the timely repayment of
principal and interest of a bond
• Rating help investors to know about an unknown issuer.
• A rating agency is not directly involved in the process of
sale and purchase of an issue
Credit Rating
• Three credit rating agencies are recognized worldwide:
Standard & Poor, Moody’s Investor Service, Fitch
Ratings
• A rating agency job is to help investors to determine
the investment risk associated with issued securities.
• Factors like legal environment, structure and quality of
company’s management, possible risks are taken into
account
Credit Rating Symbols
• The credit rating symbols are generally
assigned with “triple A” as the highest and
“triple B” as the lowest
• Anything below triple B is commonly known as
“JUNK BOND”
Rating Criteria
• The following information is required:
1. Detailed income statements for the last five years for the bank and major
subsidiaries
2. Details of expense items including interest expense by type of liability
instrument and details of reserve provisions
3. Detailed balance sheet of the bank with schedules of major asset and
liabilities account
4. A comprehensive description of the organization and management
structure of the bank
Rating Criteria
5. Projections, including assumptions, for next
five years
6. Asset liability mismatch, interest rate risk
facing bank and risk management strategies
adopted by the bank
7. Loan portfolio details.
GLOBAL CAPITAL MARKET
https://saylordotorg.github.io/text_international-business/s11-02-
understanding-international-ca.html
GLOBAL ECONOMY BY GDP – WORLD BANK
Global financial markets
• Global banks and Financial Institutions : All Central Banks , World Bank, IMF,
ADB and all….
• Financial Markets -
• Global Capital market – Primary and Secondary market
• e.g : Eurocurrency and related money markets, the international capital
• markets,
• Global Money market
• Financial Instruments /Securities :
• Market for foreign exchange : Foreign currencies , Dollar, Yen, Pond and …..
• Markets for forward contracts, options, swaps and other derivatives.
• Foreign Stock Exchanges : NASDAC., DOW ZONES
Global Capital Market
• A global capital market is the interlinking of various investment
exchanges around the world that enable individuals and entities to
buy and sell financial securities on an international level.
• Any institution, be it a bank or a corporation or government,
desirous of raising money from the capital markets can do so from a
wide range of capital instruments denominated in various
currencies.
• The domestic and international market are differentiated by
currency and location.
Global Capital Market
• The international debt market may be described as
euro bond or note markets in which issues in the
bearer form are underwritten or bought by
international syndicate of investment houses and/or
banks.
• International capital market are those in which
instruments are issued outside the country in whose
currency they are denominated
Global Capital Market
• International Equity market : International equity
markets consists of all the stock traded outside the issuing company’s
home country.
• E.g: For example, ArcelorMittal is a global steel company headquartered in
Luxembourg; it is listed on the stock exchanges of New York, Amsterdam,
Paris, Brussels, Luxembourg, Madrid, Barcelona, Bilbao, and Valencia.
Factors affecting Growth of International Equity
Market
• Growth of developing markets. As developing countries experience growth, their domestic firms seek to
expand into global markets and take advantage of cheaper and more flexible financial markets.
• Drive to privatize. In the past two decades, the general trend in developing and emerging markets has
been to privatize formerly state-owned enterprises. These entities tend to be large, and when they sell
some or all of their shares, it infuses billions of dollars of new equity into local and global markets.
Domestic and global investors, eager to participate in the growth of the local economy, buy these shares.
• Investment banks. With the increased opportunities in new emerging markets and the need to simply
expand their own businesses, investment banks often lead the way in the expansion of global equity
markets. These specialized banks seek to be retained by large companies in developing countries or the
governments pursuing privatization to issue and sell the stocks to investors with deep pockets outside the
local country.
• Technology advancements. The expansion of technology into global finance has opened new
opportunities to investors and companies around the world. Technology and the Internet have provided
more efficient and cheaper means of trading stocks and, in some cases, issuing shares by smaller
companies.
• International Bond Markets:
• The international bond market consists of all the bonds sold by
an issuing company, government, or entity outside their home
country.
• Companies that do not want to issue more equity shares and
dilute the ownership interests of existing shareholders prefer
using bonds or debt to raise capital (i.e., money).
• Companies might access the international bond markets for a
variety of reasons, including funding a new production facility
or expanding its operations in one or more countries.
Types of Bonds
• Foreign Bond:
• A foreign bond is a bond sold by a company, government, or entity in another country and issued in the
currency of the country in which it is being sold.
• For example, the bonds issued by global companies in Japan denominated in yen are called samurai bonds.
• Foreign bonds sold in the United States and denominated in US dollars are called Yankee bonds.
• In the United Kingdom, these foreign bonds are called bulldog bonds.
• Foreign bonds issued and traded throughout Asia except Japan, are called dragon bonds, which are
typically denominated in US dollars.
• Foreign bonds are typically subject to the same rules and guidelines as domestic bonds in the country in
which they are issued.
• There are also regulatory and reporting requirements, which make them a slightly more expensive bond
than the Eurobond.
• Eurobond :
• A Eurobond is a bond issued outside the country in whose
currency it is denominated.
• Eurobonds are not regulated by the governments of the
countries in which they are sold, and as a result, Eurobonds
are the most popular form of international bond.
• A bond issued by a Japanese company, denominated in US
dollars, and sold only in the United Kingdom and France is
an example of a Eurobond.
• Global Bond
• A global bond is a bond that is sold simultaneously in several
global financial centers.
• It is denominated in one currency, usually US dollars or Euros.
• By offering the bond in several markets at the same time, the
company can reduce its issuing costs.
• This option is usually reserved for higher rated, creditworthy,
and typically very large firms.
Types of debt instruments
• Bearer Securities: there is no holder’s register
and the security does not mention the name
of the investor.
• Ownership of bearer stock passes on delivery
to the purchaser
• Registered Securities: the issuer of registered
securities is responsible to ensure a register is
kept which records the names and address of
all holders of the stocks or shares and amount
held
Types of Debt Securities
• Straight Debt: they are fixed interest bonds or
debentures, which do not convey any option
for the investor to convert into equity
• Zero Coupon and deep discount Bonds:
A zero-coupon bond (also discount
bond or deep discount bond) is a bond where
the face value is repaid at the time
of maturity.
Type of Debt Instruments
• Convertible Stocks: fixed interest securities that are
exchangeable at a later date into ordinary shares on
predetermined terms are called convertibles
• ADR: An American depositary receipt is
a negotiable security that represents securities of a
company that trades in the U.S. financial markets.
Shares of many non-U.S. companies trade on
U.S. stock exchanges through ADRs, which are
denominated and pay dividends in U.S. dollars and
may be traded like regular shares of stock
Eurocurrency Markets :
• The Eurocurrency markets originated in the 1950s when communist governments in Eastern Europe
became concerned that any deposits of their dollars in US banks might be confiscated or blocked for
political reasons by the US government.
• These communist governments addressed their concerns by depositing their dollars into European banks,
which were willing to maintain dollar accounts for them. This created what is known as the Eurodollar—
US dollars deposited in European banks.
• Over the years, banks in other countries, including Japan and Canada, also began to hold US dollar
deposits and now Eurodollars are any dollar deposits in a bank outside the United States.
• (The prefix Euro- is now only a historical reference to its early days.) An extension of the Eurodollar is
the Eurocurrency, which is a currency on deposit outside its country of issue. While Eurocurrencies can be
in any denominations, almost half of world deposits are in the form of Eurodollars.
• The Euroloan market is also a growing part of the Eurocurrency market. The Euroloan market is one of the
least costly for large, creditworthy borrowers, including governments and large global firms. Euroloans are
quoted on the basis of LIBOR, the London Interbank Offer Rate, which is the interest rate at which banks in
London charge each other for short-term Eurocurrency loans.
Euro Currency Continued ……
• The primary appeal of the Eurocurrency market is that there are no
regulations, which results in lower costs.
• The participants in the Eurocurrency markets are very large global firms,
banks, governments, and extremely wealthy individuals.
• As a result, the transaction sizes tend to be large, which provides an
economy of scale and nets overall lower transaction costs.
• The Eurocurrency markets are relatively cheap, short-term financing
options for Eurocurrency loans; they are also a short-term investing option
for entities with excess funds in the form of Eurocurrency deposits.
• Raising Resources
Raising Resources
• Learning Objectives:
• The students will be able to learn and
understand:
1. the requirements for raising loan
2. The concept of syndicated loan
Introduction: what the Borrower should
consider
• The corporation( the borrower intending to raise
resources) should take into account the following
factors:
1. The identification of the need for such funds
2. Assessment of market conditions
3. Choice of currency
4. Risk exposed to
5. Type and nature of debt instruments
6. Selection of appropriate borrowing vehicle
Basic Framework For Raising Capital Debt By
Borrowers
• It is requirement of Companies Act that
issuers of debt securities to the public must be
public companies.
• Capital funds raised by a company must be
authorized by the company’s board
Identification of long term funding
requirements
• Raising capital debt from the international market is
an expensive business.
• Potential raisers should have an on going policy of
examining their present and anticipated future debt
requirements.
• The primary consideration for raising loan capital is for
improving the gearing, enable the business to develop
Identification of long term funding
requirements
• Requirements of the regulatory authorities
must be taken into account in deciding the
appropriate level of company’s capital
adequacy
Syndicated Loans
• It is an arrangement under which two or more
banks( referred as ‘the Syndicate’) come
together and agree to grant a loan to a
borrower on similar terms and conditions,
through a single document or set of
documents, administer by an agent bank
World Syndicated Loan - 2019
(Rank: Proceeds Mkt. No.
Rank Prev.Yr) Bookrunner (US$Mil) Share(%) Issues
1 (2) Bank of America 390,470 9.5% 1,396
Merrill Lynch
2 (1) JP Morgan 353,937 8.6% 1,282
3 (3) Citi 253,075 6.2% 766
4 (4) Wells Fargo & Co 211,251 5.2% 1,065
5 (7) Barclays 170,998 4.2% 597
6 (11) Goldman Sachs & 159,448 3.9% 489
Co
7 (6) Mitsubishi UFJ 149,932 3.7% 1,113
Financial Group
8 (5) Mizuho Financial 144,457 3.5% 760
Group
9 (8) Deutsche Bank 136,714 3.3% 531
10 (14) RBC Capital 122,793 3.0% 487
Markets
···
Total 4,099,929 100.0% 8,910
https://www.bk.mufg.jp/global/productsandservices/corpandinvest/
syndication.html
Advantages
• Advantages to the borrower:
1. Large sums can be raised conveniently
2. In case of borrowings from a
syndicate( instead of multiple banking) it is
convenient for the borrower to have
centralized negotiation providing flexibility
and speed
3. Single set of documentation
4. Borrower is able to raise resources at
competitive rates
Advantages
• Advantages to the participating banks:
1. Credit risk is distributed among many banks
2. It strengthens the relationship between the borrowers
and a bank thereby providing opportunity to enter into
new market segments of high net worth borrowers
3. A small bank can also participate in lending to large
corporate thereby enhancing its participation in
syndicated loan market
4. Bank administration of the credit facility is convenient as
loan is administered by agent bank
5. There is secondary market for the syndicated loan- any
bank can at later stage sell its shares to other takers
Market for Syndicate Credit
• The borrowers are usually major MNC’s, State
Government Agencies and those who need
project finance.
• The major loan arrangers are commercial
banks, merchant banks etc
Arrangement of Syndicated Credit
• There are broadly two different practices of
arrangement syndicated loans:
1. Club loans
2. Syndicated loans
Arrangement of Syndicated Credits
• Club Loans: it is a private arrangement
between borrower and lending banks.
• If the loan amount is relatively smaller and
parties know each other well, lending banks
forms a club and give the loan.
• Procedures are less formal and deals are not
publicized in the press
Arrangement of Syndicated Credits
• Syndicated Euro Credit involve a full fledged
arrangement for organizing a loan transaction.
• It is publicized and banks and borrowers from all over
the world can participants
• The process involves a number of stages:
1. Borrower has to decide the size of loan, tenor and
currency
2. Appoints a lead manager(bank)
3. Syndicated loan can be fully or partially underwritten
basis or best efforts basis
Project Finance
• The capital cost of the project is to be decided
first.
• An underestimate of the cost will result in an
over run of the capital cost.
• This may lead to the project being left
incomplete for want of finance.
• The higher cost will also raise the cost of
production, which reduce the profitability
MUFG's (Japan Largest Bank) Global Presence in Project Finance
As a result of our long-term commitment to the business, MUFG is the leading project finance bank
globally…Dec 2019
Rank Arranger Amount in USD million No. of Deals
1 MUFG 16,151 134
2 SMBC 15,981 121
3 Mizuho Financial 12,642 69
4 SBI 11,338 4
5 BNP Paribas 10,004 86
6 Santander 9,806 114
7 Societe Generale 9,401 90
8 ING 9,264 86
9 Credit Agricole 9,215 91
10 Bank of China 7,629 44
Market Total 296,608 816
Long term Sources of Finance
• The project can be financed by way of:
1. Issue of ordinary /preference shares
2. Issue of convertible debentures and bonds
3. Term loan from financial institutions and bank
4. Unsecured loans and deposits
5. Foreign Investments
6. Deferred credit from suppliers of equipment and
machinery
7. Leasing finance
8. Internal Accruals- in case of expansion, diversification,
modernization etc
Financing of Mergers and Acquisition
The issues to be considered
• Risk
• Ownership
• Duration
• Debt capacity
• Equity finance
Role of FII’s and FDI’s
• FII: Foreign Institutional Investor means an
investor or investment fund that is from or
registered in a country outside the one in
which it is currently investing.
• It includes AMC, Pension Funds, Mutual
Funds, Investment Trusts as nominee
companies, university funds, charitable trusts
etc
FII under Portfolio Investment Scheme
• SEBI acts as the nodal point in the entire process of FII
registration.
• FII are permitted to buy and sell securities and open foreign
currency and Non Resident Rupee accounts with a designated
bank branch.
• A registered FII may purchase/sell the shares and convertible
debentures of an Indian Company, units of domestic Mutual
Funds under portfolio investment scheme
FII under Portfolio Investment Scheme
• The shares and convertible debentures of an
Indian Company are to be purchased by the
registered FII through registered brokers on
recognized stock exchange.
• There are certain restrictions and percentage
ceiling with regard to holding by each FII
FDI
• Foreign Direct Investment is one of the main sources
of foreign capital for developing economies.
• It is defined as an investment made by an investor of
one country to acquire an asset in another country
with intention of managing that asset.
• FDI contribute towards international trade, transfer
of technology, enhancement of skills etc
FDI in India
• As per the present provisions of Foreign
Exchange Management Act, 1999, issue of
shares by Indian companies to foreign
collaborators is permitted either under the
automatic route or government approval
route.
FDI in India
• Automatic Route:
• FDI up to 100% is allowed under the automatic
route in all activities/sectors except the
following:
1. Activities that require industrial license
2. Proposals in which the foreign collaborator has
an existing financial/technical collaboration in
India in the same field
3. All proposals outside notified sectoral
policy/caps or under sectors in which FDI is not
permitted
FDI
• Under automatic route no approval of
government is required.
• The investors are only required to notify the
Regional office concerned of RBI within 30
days of receipt of inward remittances and file
the required documents with that office
within 30 days of issue of shares to foreign
investors.
FDI in India
• Government Route: activities not covered in
automatic route requires prior approval from
government
• They are considered by FIPB, Ministry of
Finance
• Indian companies having foreign investment
approval through FIPB route do not require
any further clearance from RBI for receiving
inward remittances and issue of shares to
foreign investors
Prohibited FDI
• FDI is prohibited under government and automatic
route for following sectors:
1. Retail Trading
2. Atomic Energy
3. Lottery Business
4. Gambling and Betting
5. Housing and Real Estate Business
6. Agriculture( excluding Floriculture, Horticulture,
development of seeds, Animal Husbandry etc)
ADR
• American Depositary Receipts (ADRs) are the
stocks of the foreign companies which are
traded in the American markets.
• ADRs are purchased by the investors in U.S.
dollars during the normal trading hours in the
U.S. market through the brokers of the U.S.
which allows the people of America to invest
in foreign companies.
• ADR is a list of all the Indian Companies listed
on New York Stock Exchange
• https://
www.indiainfoline.com/markets/depository-re
ceipt/gdr-adr-idr
• The Complete List of Indian ADRs
• https://topforeignstocks.com/foreign-adrs-
list/the-full-list-of-indian-adrs/
How ADR Works
• Investors willing to invest in American Depositary
Receipts can purchase them from brokers or
dealers.
• It involves buying the stocks of the foreign
company in the issuer’s home market and
depositing the acquired shares in a depository
bank in the overseas market.
• The bank then issues ADRs that are equal to the
value of the shares deposited with the bank, and
the dealer/broker takes the ADR to US financial
markets to sell them.
How ADR Works
• Investors who purchase the ADRs are paid
dividends in US dollars.
• The foreign bank pays dividends in the native
currency, and the dealer/broker distributes
the dividends in US dollars after factoring in
currency conversion costs and foreign taxes
• The US banks that deal with ADRs require the
foreign companies to furnish them with their
financial information, which investors use to
determine the company’s financial health.
GDR
• Global Depository Receipt (GDR) is an instrument
in which a company located in domestic country
issues one or more of its shares or
convertibles bonds outside the domestic country.
• In GDR, an overseas depository bank i.e. bank
outside the domestic territory of a company, issues
shares of the company to residents outside the
domestic territory.
• Such shares are in the form of depository receipt
or certificate created by overseas the depository
bank.
GDR Example
• A company based in USA, willing to get its stock
listed on German stock exchange can do so with the
help of GDR.
• The US based company shall enter into an agreement
with the German depository bank, who shall issue
shares to residents based in Germany after getting
instructions from the domestic custodian of the
company.
• The shares are issued after compliance of law in both
the countries.
GLOBAL DEPOSITORY RECEIPT MECHANISM
• The domestic company enters into an agreement with the
overseas depository bank for the purpose of issue of GDR.
• The overseas depository bank then enters into a
custodian agreement with the domestic custodian of such
company.
• The domestic custodian holds the equity shares of the
company.
• On the instruction of domestic custodian, the overseas
depository bank issues shares to foreign investors.
• The whole process is carried out under strict guidelines.
• GDRs are usually denominated in U.S. dollars
GLOBAL DEPOSITORY RECEIPT MECHANISM
• The domestic company enters into an agreement with the
overseas depository bank for the purpose of issue of GDR.
• The overseas depository bank then enters into a
custodian agreement with the domestic custodian of such
company.
• The domestic custodian holds the equity shares of the
company.
• On the instruction of domestic custodian, the overseas
depository bank issues shares to foreign investors.
• The whole process is carried out under strict guidelines.
• GDRs are usually denominated in U.S. dollars
• The Complete List of Indian GDRs
• https://topforeignstocks.com/foreign-adrs-
list/the-complete-list-of-indian-gdrs/
