The Global Bond Market. Prof. Ian GIDDY. The International Capital Market

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1 Giddy The Global Bond Market /1 The Global Bond Market Prof. Ian GIDDY Stern School of Business New York University The International Capital Market International bank financing Eurobonds, foreign bonds and global bonds Project financing Copyright 2003 Ian H. Giddy The Global Bond Market 5

2 Giddy The Global Bond Market /2 Alternative Sources of Short-Term Financing FINANCING DOMESTIC LOANS EUROMARKET LOANS SYNDICATED EUROCREDITS NOTE ISSUANCE FACILITIES EUROCOMMERCIAL PAPER DEBT EQUITY Copyright 2003 Ian H. Giddy The Global Bond Market 7 Alternative Sources of Long-Term Financing Bank credits - syndicated lending and facilities Bonds Domestic, foreign, Euro Public, private FINANCING DEBT EQUITY Structured, such as principle-indexed notes Medium-term notes Asset-backed financing and leasing Project financing Copyright 2003 Ian H. Giddy The Global Bond Market 8

3 Giddy The Global Bond Market /3 The Global Bond Market Domestic bonds Foreign bond (Issued within country of currency, by nonresident issuers) Eurobonds (Issued and sold in a jurisdiction outside the country of the currency of denomination) Global Bonds (Issued in the domestic and the Eurobond markets simultaneously) Copyright 2003 Ian H. Giddy The Global Bond Market 10 The Global Bond Market Domestic bonds Foreign bond (Issued within country of currency, by nonresident issuers) Eurobonds (Issued and sold in a jurisdiction outside the country of the currency of denomination) Global Bonds (Issued in the domestic and the Eurobond markets simultaneously) Copyright 2003 Ian H. Giddy The Global Bond Market 11

4 Giddy The Global Bond Market /4 International Bond Markets are Linked Issuers and investors compare terms in the domestic and Eurobond markets, which are linked across currencies via currency swaps BOND MARKETS WITHIN COUNTRY OF CURRENCY Domestic US - Gov't - Corporate Foreign Bonds "Yankee" Domestic Japanese - Gov't - Corporate Foreign Bonds "Samurai" BOND MARKETS OUTSIDE COUNTRY OF CURRENCY Eurodollar Bond Market Currency Swaps Long-dated Forward Exchange Euroyen Bond Market Copyright 2003 Ian H. Giddy The Global Bond Market 12 Foreign Bonds A foreign bond is a bond issued in a host country's financial market, in the host country's currency, by a foreign borrower The three largest foreign bond markets are Japan, Switzerland, and the U.S., representing issuance of about $40 billion in bonds annually Copyright 2003 Ian H. Giddy The Global Bond Market 13

5 Giddy The Global Bond Market /5 Characteristics of Eurobonds Issued outside country of currency Not subject to domestic registration or disclosure requirements In most cases take form of private placements Placed through syndicates in many countries who sell principally to nonresidents Bonds are structured so as to be free of withholding tax Bearer form But... Eurobonds usually influenced de facto by government and banks of country of currency Copyright 2003 Ian H. Giddy The Global Bond Market 15 Copyright 2003 Ian H. Giddy The Global Bond Market 16

6 Giddy The Global Bond Market /6 Pricing Bonds: The Yield Curve bondsonline.com Copyright 2003 Ian H. Giddy The Global Bond Market 17 Benchmark Bonds Copyright 2003 Ian H. Giddy The Global Bond Market 18

7 Giddy The Global Bond Market /7 Corporate Bonds: Spread over Benchmark Copyright 2003 Ian H. Giddy The Global Bond Market 19 Bond Credit Ratings Moody s Aaa Aa A Baa Ba B Caa Ca C Standard & Poor s AAA AA A BBB BB B CCC CC C D Interpretation High-quality debt instruments Strong to adequate ability to pay principal and interest Ability to pay interest and principal speculative In default Copyright 2003 Ian H. Giddy The Global Bond Market 20

8 Giddy The Global Bond Market /8 Rating Criteria Profitability Capital Structure Business Model Management Quality of earnings Ebitda margins Interest coverage indicators Volatility of earnings Cost Management Indebtedness ratios Distribution of debt maturities Effects of concentrated ownership on funding capabilities Barriers to entry Competitive environment Market position Diversification : Clients, Products, Geographic Management Structure Strategy and Objectives Performance Record Copyright 2003 Ian H. Giddy The Global Bond Market 21 Rating Process Issuer/Banker Requests rating List information requirements Due diligence & Meeting with management Pool credit analysis Legal analysis Stress testing Credit enhancement negotiation Deal documentation Rating committee Presale report Final report Surveillance Copyright 2003 Ian H. Giddy The Global Bond Market 22

9 Giddy The Global Bond Market /9 Ratings and Spreads Corporate bond spreads: basis points over Treasury curve Rating 1 year 2 year 3 year 5 year 7 year 10 year 30 year Aaa/AAA Aa1/AA Aa2/AA Aa3/AA A1/A A2/A A3/A Baa1/BBB Baa2/BBB Baa3/BBB Ba1/BB Ba2/BB Ba3/BB B1/B B2/B B3/B Caa/CCC Source: bondsonline.com Copyright 2003 Ian H. Giddy The Global Bond Market 23 Protection Against Default: Examples Collateral Covenants Subordination of future debt Dividend restrictions Sinking funds Copyright 2003 Ian H. Giddy The Global Bond Market 24

10 Giddy The Global Bond Market /10 Global Bonds Copyright 2003 Ian H. Giddy The Global Bond Market 25 Key Dates in the Issuance of a Eurobond Issuance need or opportunity identified Issuer discusses deal with lead manager Announcement of Eurobond issue Syndicate formed, bonds "presold" prior to final terms Offering day: Eurobond issued Final terms, bonds sold by selling group to investors Closing day: Eurobonds delivered, Issuer gets money Copyright 2003 Ian H. Giddy The Global Bond Market 26

11 Giddy The Global Bond Market /11 Issuing a Bond: Key Players in the Issuance of a Eurobond SELLING GROUP UNDER- WRITERS MANAGERS Copyright 2003 Ian H. Giddy The Global Bond Market 27 Underwriting Economics Management Fee 20% Management Fee: Normally shared equally among managers (may be subject to a praecipium for Global Coordinator or Lead Manager) Underwriting Fee 20% Underwriting Fee: Based on underwriting commitment (often less expenses of offering) Selling Concession 60% Selling Concession: Payable as a percentage of allocation (determined by book-runner) Copyright 2003 Ian H. Giddy The Global Bond Market 28

12 Giddy The Global Bond Market /12 Pricing and Fees The Issuer Fees Pricing The Business Telecoms Dot-Coms Debt 0.15% to 1.5% T+Spread L+Spread Avons (How much volatility?) Equity 5% to 7% Comparables/Ratios The market Future cash flow valuation Copyright 2003 Ian H. Giddy The Global Bond Market 29 Case Study: South Africa Bond Financing 1. Why would S.A. issue a US dollar Eurobond? 2. Why has the government issued different kinds of bonds? 3. How would you explain the Eurobond issuance process and costs to an issuer? 4. What would be involved in getting a rating for a company? Copyright 2003 Ian H. Giddy The Global Bond Market 30

13 Giddy The Global Bond Market /13 Contact Info Ian H. Giddy NYU Stern School of Business Tel ; Fax Copyright 2003 Ian H. Giddy The Global Bond Market 32