Financing the Multinational Corporation. International Financing and National Capital Markets

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1 Financing the Multinational Corporation International Financing and National Capital Markets Money, like wine, must always be scarce with those who have neither wherewithal to buy it nor the credit to borrow it. Adam Smith (1776) Examples: GM packages car loans and sells them in Europe and Japan (ABS) BT offers stock in London, NYC and Tokyo Daimler-Chrysler has stock trading in 6 stock exchanges around the world Beneficial Corp. issues Euroyen notes that may not be sold in the US and Japan Swiss Bank Corp. helps RJR Nabisco sell Swiss franc bonds and then swap the proceeds in US dollars Corporate Sources and Uses of Funds Investment Bankers Underwriting 1

2 Publicly issued bonds Privately placed bonds (very similar to direct loans) Covenants Financial Markets Versus Financial Intermediaries Securitization: replacing direct bank borrowing with negotiable securities giving claim to cash flows from less-liquid assets (credit cars, consumer loans, mortgage pools, etc.) Financial Deregulation US: 1981 Japan: 1986 EU: 2010? Private placements Financial intermediaries Financial System and Corporate Governance Corporate Governance Keiretsus (Japan), chaebols (South Korea), holding companies (Europe) Twin agency problems: Government expropriation 2

3 Minority rights (dis-)abuse Germany s universal banking Wind of change: Japanese banks were required by law to reduce their ownership in other companies to below 5% by December, Globalization of Financial Markets Improve competitiveness Regulatory arbitrage Sweden s experiment in early 1990 (tax on stock and bond trading survived only a year) Germany s experiment in mid-1989 (interest withholding tax massive capital flight; survived only 6 months before it was repealed) Financial innovation Affects corporate value (recall that Modigliani-Miller fails in this case) National Capital Markets as International Financial Centers The Role and Consequences of Well-Functioning Financial Markets Factors Promoting Well-Functioning Financial Markets Secure property rights 3

4 Contracts easily enforceable Meaningful accounting information Transparent financial statements Accountability of borrowers and investors Borrowers and investors bear the consequences of their decisions Financial Institutions Mobilize Savings Allocate Resources Facilitate Risk Transfer and Risk Management Monitor Managers Exert Corporate Control Supply Liquidity Consequences Greater Capital Accumulation Better Projects More Innovation Managerial Accountability Preferred Time Pattern of Consumption Results Stronger Economic Growth (US/UK 3-4%, EU 1-2%) 4

5 Greater Consumer Satisfaction Greater Capital Productivity International Financial Markets Entrepôts: Zurich, Luxembourg, Singapore, Hong Kong, the Bahamas, Bahrain, and lately Dubai Political stability with minimal (but meaningful) regulation leads to financial market pre-eminence (London became the center of Euromarkets about 45 years ago) Foreign Access to Domestic Markets US Interest Equalization Tax (IET): The Foreign Bond Market Yankee bonds Samurai bonds Shogun bonds Global bonds Fixed-rate issues Floating-rate notes Equity-related bonds Convertible bonds Equity warrants Dual currency bonds 5

6 Commodity-related bonds (Oil is a good example) The Foreign Bank Market The Foreign Equity Market Yankee stock issues Rule 144A (private placements): 36 Turkish MNCs have placed equity/debt in the US Global shares Globalization of Financial Markets Has Its Downside Capital flight is also possible not just capital inflow! This usually leads to large currency devaluations (Asian currency crisis, 1997) Meaningful government regulation (witness Japan/South Korea s dismal bank record following their governments misguided economic/public policies) Development Banks Large-scale infrastructure projects financed at concessionary interest rates Benefit MNCs directly and indirectly First, MNCs can actually build/provide the necessary goods/services (cash flow) Second, better infrastructure means more investment in the future and better business prospects for MNCs 6

7 Thirdly, it is worth going through the red-tape in order to obtain a cheaper source of funds/loans The World Bank Group IBRD IFC IDA Regional and National Development Banks Regional Development Banks EIB IADB ADELA Asian Development Bank African Development Bank Arab Fund for Economic and Social Development (AFESD) EBRD National Development Banks Private Sector Alternatives 7

8 Project Finance In 1998, $99.5B were raised globally for project finance! $16B for Channel Tunnel (Chunnel) connecting France and England (makes it possible to live in/rent a chateau in Provance and commute for your I-Bank job in London s City!) $5B Iridium global satellite project $4B SINCOR (Venezuela s oil/gas refinery) In the Spring of 1998, I worked on a small project doing NPV/capital budgeting for the Baku-Ceyhan pipeline (and competing routes as well) for the US oil majors 8