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INBU 4200: Lecture 8
Sourcing Globally
Important Announcements
• Project 4: Due Thursday, April 8th
Upcoming “events”
• Quiz 4: Thursday, April 15th
• Exam 2: Thursday, April 22nd
The International Capital Markets
International markets span the entire globe.
Thus they represent potentially enormous
pools of capital for borrowers.
The major advantage of the international
capital markets is that the “cost of capital”
tends to be lower in these markets than in
smaller domestic markets.
If a firm has access
to global capital
markets:
It can borrow more
funds more
cheaply in
international
markets than in
domestic markets.
What are the International Capital
Markets?
• Eurocurrency markets
– Short term borrowing (loans) opportunities
• Global Bond markets
– Long term borrowing (debt) opportunities
• Global Equity markets
– Ownership (common stock) funding
Eurocurrency Markets
Eurocurrency deposit:
Short term time deposit of a currency in an
international bank located in a country
other than the country which issued the
currency!
Example: U.S. dollar deposits in
commercial banks outside of the United
States
Eurocurrency Loans
• International banks having received
Eurocurrency deposits, will lend these out
to borrowers on a short basis.
• Borrowers include multinational firms.
• Loan maturities generally 3 to 6 months.
• Borrowing rates typically lower than
domestic borrowing rates.
Attraction of the Eurocurrency Markets
Because of the absence of regulations:
• The markets offer higher deposit rates.
• The markets charge lower loan rates.
These banks operate on smaller spreads (or
margins) than do domestic banks.
Rate of
interest
Interest Rate
Spreads in
Domestic and
Eurocurrency
Markets
Domestic
lending
rate
Eurocurrency
lending rate
Eurocurrency
deposit rate
Domestic
deposit
rate
%
Global Bond Markets
These are international markets for long
term debt borrowing. There are two basic
types of global bond markets:
• Foreign Bond market
• Eurobond (Offshore) market
Foreign Bond Market
• A bond issued by a foreign borrower to
investors in a country other than that of the
foreign borrower.
• The bond will also be denominated
(payable) in the home currency of the
investor.
• Example: A Chinese company issuing a
U.S. dollar denominated bond in the
United States.
Foreign Bond Market
• Corporations usually issue foreign bonds
because of the low interest rates (borrowing
costs) in foreign capital markets compared to
their own domestic markets.
• In recent years, many non-Japanese companies
have issued yen denominated bonds in Japan
because of the very low borrowing costs in
Japan.
Eurobond Market
• A bond issued by any borrower to investors.
• The bond will be denominated (payable) in a
currency which is different from the home
currency of the investor.
• The bond will NOT be offered in the capital
market of the country whose currency it is
denominated in.
• Example: A Chinese company issuing a U.S.
dollar denominated bond in Japan. This bond
will NOT be issued in the United States.
Eurobond market
• Corporations generally issue eurobonds
because of their relatively low interest rates.
• Corporations are also potentially attracted to
eurobonds because they can borrow their home
currency and generally at rates lower than back
home.
For Example: A U.S. corporation issuing a U.S.
dollar denominated eurobond in Japan.
Eurobond Market
• Another attractive feature of this market is
the absence of government regulations.
• Thus companies can raise money in the
eurobond market with less disclosure
requirements than in domestic markets.
• This means less cost for compliance and
probably quicker transactions.
Global Equity Markets
• There is no international equity market as
there is for Eurocurrencies and bonds.
• Individual countries have their own
markets to trade corporate stocks.
• The most important of these stock markets
are also open to foreign companies for the
purpose of raising capital.
Two Important Trends in Equity
Markets:
• Internationalization of corporate
ownership.
– Non-residents buying equity positions
companies.
• Global companies widening their stock
ownership by listing their stock on many
foreign stock exchanges.
– Referred to as cross-listing.
Cross Listing
Refers to a company having its shares listed
on one or more foreign stock exchanges.
Has become very popular in recent years.
In 2001, there were 2,461 cross listings on
the world’s 51 major stock exchanges.
Why Cross Listing
Cross listing is done for a variety of reasons:
• Establishing name recognition for the
company in a new capital market
– Paves the way for new sources of funds.
– Facilitates future acquisitions in that
country.
• Establishing name recognition for the
company in a new consumer market.
Global Firms and Stock Markets
Global companies are turning to foreign stock
markets to raise capital.
They are attracted to foreign stock markets
because of the potential ability to raise large
amounts of capital (and more than they could at
home).
The United States is a favorite market for doing so.
Foreign Firms and The United States
Stock Markets (2001)
Exchange
Number of Foreign Firms
America
New York
NASDAQ
Total
48
461
445
954
How are Cross Listed Stocks Traded
A company can have its stock traded on
foreign stock markets through two
methods:
• Stock can be traded directly, or
• Stock can be traded in the form of a
depository receipt.
– This is the most popular method.
Depository Receipts
Represents a claim against a number of
shares of stock of a foreign company.
The actual shares of stock are held by a
custodian bank in the country of the
foreign company.
The depository receipt is cross listed and
trades on various stock markets.
American Depository Receipts (ADRs)
Foreign firms trade on American stock
exchanges through American Depository
Receipts (ADRs).
In 2002, there were 600 ADR listings,
representing companies from 80 countries,
trading on United States stock exchanges.
Global Depository Receipts (GDRs)
Other major stock markets have depository
receipt programs similar to ADRs.
In London, foreign stocks trade through a
program called Global Depository
Receipts. It is similar to the ADR program
in the United States.
Growth of International Capital Markets
• By most accounts, these international capital
markets are growing at a rapid pace.
• From 1994 to 2001, international bonds rose
from $600 billion to $7.0 trillion.
• From 1990 to 2000, international equity offerings
rose from $20 billion to $315 billion.
• From 1990 to 2002, cross border bank loans
rose from $3.6 billion to $9.5 billion.
Impact of Global Capital Markets for
Managers of International Firms
• Access to global capital markets should offer
firms the opportunity for sourcing lower cost
funds.
– Both debt (long and short term) and equity.
• Lower cost funds can reduce a firm’s cost of
capital.
– The firm can become more competitive