125220 _16(T7): Capital markets - Euromarkets

• Many nations are not self-sufficient in funds ⇒ need for transfer of funds between them
• NZ & Australia & others- countries having expenditure greater than income & so rely on savings of other countries to balance their shortfalls. – Some nations have surplus & provide credit
• International markets offer direct or intermediated funding

• The establishment of retail networks in other countries by banks originally to take advantage of economic development Example:Kookmin bank in NZ
• International diversification by banks may help to smooth out profit performances

• Major banks will often select a particular market niche of products and services. e.g New Zealand banks
• International wholesale banking tends to be driven by following customers abroad. e.g. entry of Chinese banks to NZ

• Buying & selling foreign exchange
• Direct or clean payments e.g. for trade-payment before or after receipt of goods, using bank draft & SWIFT.
• Extension of credit for trade & payments by bills of exchange. Issuance of Bankers’ Acceptances for trade

• Bank agrees to pay seller of goods when draft expires on behalf of importer
• Acceptance of trade bill ⇒ negotiable instrument & may be traded in money markets (not many in NZ).

• Involves importer substituting bank that promises to pay for goods held overseas or imported
• Reduces payment risk

• Began after WWII when Soviet Union(Russia) initially moved its US deposits to bank in Paris, with Telex code of Eurobank. Due to various financial restrictions in US, this international mkt grew.
• The Euromarket offers both direct & indirect financing

• Large international market made up of international banks (eurobanks) that accept large deposits & provide large loans.
• "A financial transaction conducted in a foreign country, but not in the currency of that country"

Less regulated, often offer better interest rates than local financial markets. Due to large size of transactions.

• Eurocurrency markets
• Euronote markets
• Eurobond markets

Participants in markets may be exposed to foreign exchange risk

Involves intermediated euromarket transactions (banks accept eurocurrency deposits, provide eurocurrency loans)

• Short-term bank advances
• Eurocurrency standby facilities

• Term loan provided by bank to borrower, but not in currency of country in which bank is located
• Can set up revolving credit arrangement, interest repriced at each rollover date based on reference interest rate such as LIBOR

Contingency line of credit that is established with a financial institution

• LIBOR - London Interbank Offered Rate = the average of rates at which banks in London market will lend to each other
• SIBOR - Singapore Interbank Offered Rate

• Minimum size at least USD3 million.
• Often involves syndicate of banks with lead manager, comanagers, participating banks, agent banks
• Term normally 5-10 years.
• Interest rate: LIBOR plus a margin.

• Lead Managers
• Participating Banks
• Agent bank

• Arranger of syndicated debt facility.
• Structures issue, Forms syndicate, prepares documentation

Banks that provide funds as part of syndicated loan facility

Conducts ongoing admin role of established syndicated loan facility

Bond issued into a foreign market, but not in the currency of that market

• 1. Decision to issue eurobond (between borrower and lead manager)
• 2. Announcement of eurobond issue
• 3. Offering day with final terms (<2 weeks of public placement)
• 4. Closing day: selling group pays for bonds

Prelim prospectus prepared by lead manager

Notice placed in financial press advising details of completed issue of securities

Contingent trading in security before actual closing date of the primary issue

• Interest - most fixed-interest
• Fees - range from 1.5% - 2%
• Location - no physical location
• Borrowers - must have high credit ratings to succeed
• Investors - corporations, domestic/central banks, investment institutions, wealthy individuals