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The International Bond Market
Ravi Agarwal
Types of Bond Markets
Corporate
Government and agency
Mortgage backed, asset backed, CDO.
Funding
Municipal
Participants
Institutional Investors
Governments
Traders
Individuals
Types of Bonds
Foreign BondsForeign Bonds
Global BondsGlobal Bonds
EurobondsEurobonds
Foreign Bonds
Issued in a country's national bond market by an issuer not domiciled in that country where those bonds are subsequently traded and they are denominated in the domestic currency.
There is no direct exchange rate exposure.
Types of Foreign Bonds
Yankee bond in the US
Samurai bond in Japan
Bulldog bond in the UK
Rembrandt Bond in Spain
What lead to Global Bond / Eurobond ?
Introduction of Interest Equalization Tax.
Restricted financing of FDI by US
corporations
The Glass-Steagall Act prevented US
commercial banks from issuing and dealing
in bonds.
Global Bonds
Sold simultaneously on several markets in Sold simultaneously on several markets in the currency of each marketthe currency of each market
First offered by the World Bank, Ontario-First offered by the World Bank, Ontario-Hydro, and Hydro-Quebec.Hydro, and Hydro-Quebec.
Eurobonds (part of Global Bond)
A Eurobond is a bond issued and traded in a A Eurobond is a bond issued and traded in a country other than the one in which its country other than the one in which its currency is denominated. A Eurobond does currency is denominated. A Eurobond does not necessarily have to originate or end up in not necessarily have to originate or end up in Europe although most debt instruments of Europe although most debt instruments of this type are issued by non-European entities this type are issued by non-European entities to European investors.to European investors.
Features
Underwritten by international syndicate of banks.
Issued by MNEs, large domestic corporations,
government and international institution.
Offered simultaneously in different capital markets.
Examples of Eurobond
Wal-Mart issues bonds denominated in U.S. dollars on the German financial markets.
The French government issues euro-denominated bonds on the Japanese financial markets.
Why attractive ?
Absence of regulatory interference
Less stringent disclosure
Favorable Tax status
Eurobonds are rated by Moody’s , S&P just
as its done in US markets
Market Composition
Issuer Lead and Co-Manager Underwriter Sellers Trustees Paying Agents
Types of Instruments
Straight Fixed-Rate Issues (66%)
Structured Notes and Floating-Rate Notes (32%)
Equity Related Issues (2%)
Different options
INSTRUMENT INTERESTFREQUENCY
COUPON TYPE CURRENCY PAYOFF
Straight fixed-rate annual Fixed Currency of issue
Floating rate note annual orquarterly
Variable Currency of issue
Convertible bond annual Fixed Currency of issue orconvertible
Straight fixed-rate withequity warrants
annual Fixed Currency of issue plusshares
Zero-coupon bond none Zero Currency of issue
Dual-currency bond annual Fixed Dual Currency
Composite currencybond
annual Fixed Composite currency
Selecting the Currency
Coca-Cola wishes to Coca-Cola wishes to raise $1 b. The raise $1 b. The company can issue company can issue dollars or pounds dollars or pounds denominated bonds. denominated bonds.
Dollars (billions) Pounds (billions)
Initial amount raised 1 1/S($)
Principal payment [1+r($)]n [1+r(pounds)]n /S
Coca-Cola will float the pound bond only if:Coca-Cola will float the pound bond only if:
[1+r($)][1+r($)]n n > E[S] [1+r(pounds)]> E[S] [1+r(pounds)]nn /S /S
Writing E[S] = S(1+d)Writing E[S] = S(1+d) n n, where d is the expected annual rate of , where d is the expected annual rate of change in the exchange rate, Coca-Cola will float the pound change in the exchange rate, Coca-Cola will float the pound bond only if:bond only if:
r($) > r (pounds) + dr($) > r (pounds) + d
The Gray Market
It is a forward market for overpriced It is a forward market for overpriced EurobondsEurobonds
Once the issue has been announced the seller Once the issue has been announced the seller might decide to re-sell the bonds immediately might decide to re-sell the bonds immediately for forward delivery at 98-99% of par. This is an for forward delivery at 98-99% of par. This is an attempt to disguise the fact that the issue is attempt to disguise the fact that the issue is
overpriced.overpriced.
Exemplification
Issuer Weyerhauser (1983) Osaka Gas (1993)
Amount $60 m $250 m
Maturity 7 years 5 years
Coupon 11.5% 5.75%
Issue price $100 $101.489
Listing LuxSE London
Total commission 1.875% 1.875%
Lead Manager Morgan Stanley Goldman Sachs
Gray market price -1.5 to -1.25% + 0.25%
Date Oct. 19,1984 October 1984
Type of security Issues $1.8 b Euro-discount bonds Buys $1.8 b of US T- bonds
Maturity November 15, 2004 November 15, 2004
yield 11.65% 11.825%
Net proceeds +$ 198.6 m -$181 m
Onshore-Offshore Arbitrage: EXXON Capital Corporation, a Onshore-Offshore Arbitrage: EXXON Capital Corporation, a subsidiary of EXXON Corporationsubsidiary of EXXON Corporation
Up-front arbitrage profit: $17.6 mUp-front arbitrage profit: $17.6 m
Pfandbriefe Market
German mortgage-bond market– largest asset in European bond market and 6th
largest in world– bonds issued by mortgage banks in Germany
highly regulated bonds backed by mortgage pools so covered – no
single case of insolvency in this market
– public Pfandbriefe – loans to public sector entities– mortgage Pfandbriefe – residential and
commercial mortgages
Brady Bonds for emerging market
Bonds that represent a restructuring of nonperforming bank loans of governments into marketable securities.
Brady bonds are made more attractive than the original debt as they carry an array of guarantees These bonds are then offered through international commercial banks.
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