NATIONAL CAPITAL MARKET

AND INTERNATIONAL FINANCING

G

A

L

I

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Someone is sitting

in the shade today

because someone

planted a tree

a long time ago.

Warren Buffett

ReferenceMultinational Finance Management 8th Edition, Shapiro, Alan C., 2006.

+ Additional material from Investopedia & Wikipedia.

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Corporate Sources & Uses of FundsFinancial Markets vs Financial Intermediaries; Globalization of Financial Markets

National Capital MarketsAs International Financial Centers

Development BanksWorld Bank Group; Regional & National Development

Project FinanceFinancing large-scale capital investment

Learning Objectives

To describes trends and differences in corporate financing

To define securitization and explain the forces that underlie it

To explain why bank lending is on the decline worldwide

T o explain what is meant by the globalization of financial markets

To identify the functions and consequences of financial markets

To describe the links between national and international capital markets

To explain why firms may choose to raise capital overseas

To descibes the types and roles of development banks

Source of Funds

Internally Generated Cash

Short-term External Fund

Long-term External Fund

External finance come from investor / lender.

Debt is the preferred alternatives – accounts for the overwhelming share of external funds.

While, New stock issues play a relatively small and declining role in financing investment.

Whether debt/ equity, the issuer will turn to investment banker to assist in designing and marketing the issue.

And compensated by the spread between the price at which they buy the security and the price at which they can resell it to the public.

Financial Intermediaries

VS

Financial Markets

Financial MarketAny market place where buyers and sellers participate in the trade of

assets such as equities, bonds, currencies, & derivatives.

Typically defined by having transparent pricing, basic regulations on

trading, costs and fees and market forces determining the prices of

securities that trade.

Financial IntermediaryAn entity that acts as the middleman between two parties in a financial

transaction.

Typical intermediary: commercial bank. Also includes investment banks,

insurance companies, broker-dealers,mutual funds and pension funds.

Investopedia

Securitization is the process

through which an issuer

creates a financial instrument

by combining other financial

asset and then marketing

different tiers of the repackaged

instruments to investors.

Investopedia

Print screen from

Bank Borrowing

Corporate BorrowingU.S. & British industry

German, French, & Japanese industry

Trends in external financing:

Recent technological & telecommunications

improvement have greatly reduced the

cost of obtaining and processing

information about the conditions that affect

the creditworthiness of potential borrowers.

“

Investors are now more likely to find it cost-

effective to lend directly to companies rather

than indirectly through financial

intermediaries, such as commercial

banks.

“

So…?

Financial Market…win?

FINANCIAL SYSTEMS &

CORPORATE GOVERNANCE

Different financial system in terms of Corporate Governance

Market-oriented financial system

in U.S. and U.K. (refer to Anglo-Saxon model).

Bank-centered finance financial system

in Germany, France, & Japan (CEJ type financial system).

Keiretsu

is a large industrial grouping with a major

bank at the center. Keiretsu ties a complex

web of tradition, cross-shareholding,

trading relationship, management, and

information swapping.

Wikipedia

The one-set policy

BANK

The cost of accessing

capital market directly

=Japanese companies

turn to corporate bond

=Shareholder-oriented

management approach

The world has become one vast,

interconnected market. Markets

for government securities &

certain stocks, foreign exchange

trading, interbank borrowing &

lending, operates continously

around the clock and around the

world in enormous size.

“

Freer

Markets

Widely

available

information

Foundation for

Global

growth

National Capital Market

as International Financial Centers

Factors Promoting Well-Functioning Markets

Secure property right Contract easily enforceableMeaningful accounting information Transparent financial statement Accountability of borrowers & investors Borrowers & Investors bear the consequences of their decisions

Financial Functions Mobilize saving Allocate resources Facilitate risk transfer & risk mgt.Monitor managers Exert corporate control Supply liquidity

Consequences Greater capital accumulation Better projectsMore innovationManagerial accountability Preffed time pattern of consumption

Result Stronger economic growth Greater consumer satisfaction

International Financial Markets

Financial markets where foreigner can both borrow and

lend money

Important Int’l Financial Center

London Tokyo New York Germany & France

Entrepots

Channels through which foreign fund pass

Switzerland, Luxembourg, Singapore, Hongkong, Bahamas, Bahrain

Requirement for becoming In’t Financial Center

Political Stability Minimal government

intervention

Foreign Access to

Domestic Markets

The Foreign Bond MarketPortion of the domestic bond market that represents issues

floated by foreign companies or governments

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The Foreign Bank MarketPortion of domestic bank loans suppllied to foreigners for use

abroad

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The Foreign Equity MarketPlacing stocks in foreign market – to diversify the equity

funding risk

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Globalization of Financial Market

has its Downside

Critics for Financial Market globalization: The investors only seeks for the highest risk-adjusted return, they will swift to abandon countries whose economic fundamentals are questionable. They will demand bigger premium for the risk of holding the country, It will lead to the devaluations of the country’s currency. The devaluation raises the cost of imports and boost its interest rate.

Financial markets are in the business of

gathering and processing information from

savers and borrowers around the worlds in

order to perform their real function, which

is to price capital and allocate to its most

uses.

Markets reflect the perceptions of risk and

reward of its participants, and do not

create the underlying reality that caused

the bad perceptions of Financial Markets.

Development BankWorld Bank Group, Regional & National Development Bank

Three types of Development bank:

Regional Development Banks

• provide equity & debt financing to aid in the economic development of under developed areas.

• Include extending intermediate- to long-term capital directly.

• strengthening local capital markets.

• supplying management consulting services.

Function of Development bank:

World Bank Group: multinational

finance institution that was

established at the end of WWII to

help provide long-term capital for

the reconstruction and development

of member countries.

IBRD

IBRD makes loans for projects of high economic priority.

A government guarantee is a necessity for World Bank funding.

Bank’s main emphasized on large infrastructure projetcs (roads, dams, power plant, education, & agriculture).

Loans are tied up to debtor nations economic policies: freer trader, more open investment, lower budget deficits, & more vigorous private sector.

IFC

Finance various projects in the private sector through loans and equity participations and to serve as a catalyst for flows of additional private capital investment to developing countries.

Doesn’t require government guarantees.

Emphasized on manufacturing firm that have reasonable chance of earning the investor’s rate of return and will provide economic benefits of the nation.

Concentrate its lending & equity in investment-grade-conglomerate.

Help companies to conduct business in a more open and investor-friendly manner.

IDA

Founded in 1960, to makes loans (soft/ highly concessionary) for project in LDCs.

Require a government guarantee.

Regional Development Bank

Provide funds for financing of manufacturing, mining, agriculture,

& infrastructure projects considered important to development.

Regional Development Banks

European Investement Bank (EIB)

Inter-American Development Bank (IADB)

Atlantic Development Group for Latin America (ADELA)

Asian Development Bank (ADB)

Leading Regional Development banks:

African Development Bank (ADB)

Arab Fund for Economic & Social Development (AFESD)

National Development Bank

Have the same characteristics of success: they must attract

capable, investment-oriented management; and they must have large enough supply of economically viable projects.

Project Finance

Project FinancingThe raising of funds to finance a project in which the providers of

the funds look primarily to the cash flow from the project as

the source of funds to service their loans and provide the return

of and a return on their equity investment in a project.

Key AttributesOf project financing :

Focus on the economically separable nature of investment projects

suitable for project financing.

Nonrecourse lenders have resort only to the project assets and cash

flows (no sponsor).

The underlying assets in project are large, illiquid industrial assets.

Project have a finite life, at the end of which all debt and equity

investors are repaid.

Competition among companies for capital

force them to be more financial transparent, and

improve corporate governance with greater focus on

the rights of shareholder rather than managers.

Presented By: Galih H. Baskoro