the global bond market prof. ian giddypages.stern.nyu.edu/~igiddy/dakar/bonds.pdfmanagement fee 20%...

Giddy The Global Bond Market /1

Copyright ©1996 Ian H. Giddy

The GlobalBond Market

Prof. Ian GIDDYStern School of Business

New York University

Copyright ©2003 Ian H. Giddy The Global Bond Market 5

The International Capital Market

� International bank financing� Eurobonds, foreign bonds and global

bonds� Project financing




Alternative Sources ofShort-Term Financing

FINANCINGFINANCING

DEBT EQUITYDOMESTICLOANS

DOMESTICLOANS

EUROMARKETLOANS

EUROMARKETLOANS

SYNDICATEDEUROCREDITS

SYNDICATEDEUROCREDITS

NOTE ISSUANCEFACILITIES

NOTE ISSUANCEFACILITIES

EUROCOMMERCIALPAPER

EUROCOMMERCIALPAPER


Alternative Sources ofLong-Term Financing

FINANCINGFINANCING

DEBT EQUITY

� Bank credits - syndicated lending and facilities

� Bonds�Domestic, foreign, Euro

�Public, private

�Structured, such as principle-indexed notes

� Medium-term notes� Asset-backed financing and leasing� Project financing




The Global Bond Market

� Domestic bonds� Foreign bond

(Issued within country of currency, by non-resident 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)


The Global Bond Market

� Domestic bonds� Foreign bond

(Issued within country of currency, by non-resident 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)




International Bond Markets are Linked

� Issuers and investors compare terms in the domestic and Eurobond markets, which are linked across currencies via currency swaps

BONDMARKETSWITHINCOUNTRYOFCURRENCY

BONDMARKETSOUTSIDECOUNTRYOFCURRENCY

CurrencySwaps

Long-datedForwardExchange

Domestic US

- Gov't- Corporate

ForeignBonds

"Yankee"

DomesticJapanese

- Gov't- Corporate

ForeignBonds

"Samurai"

EurodollarBond Market

EuroyenBond Market


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




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 formBut...� Eurobonds usually influenced de facto by government

and banks of country of currency


www.ft.com




Pricing Bonds:The Yield Curve

bondsonline.com


Benchmark Bonds




Corporate Bonds: Spread over Benchmark


Bond Credit Ratings

Moody’sStandard &Poor’s Interpretation

AaaAa

AAAAA

High-quality debt instruments

ABaa

ABBB

Strong to adequate ability topay principal and interest

BaBCaaCaC

BBBCCCCCC

Ability to pay interest andprincipal speculative

D In default




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


Deal documentation

List information requirementsDue diligence &

Meeting with management

Issuer/BankerRequests rating

Pool credit analysisLegal analysisStress testing

Credit enhancementnegotiation

Rating committeePresale reportFinal report

Rating Process

Surveillance




Ratings and Spreads

Corporate bond spreads: basis points over Treasury curveRating 1 year 2 year 3 year 5 year 7 year 10 year 30 yearAaa/AAA 40 45 50 60 74 85 96Aa1/AA+ 45 55 60 70 84 95 106Aa2/AA 55 60 65 75 89 105 116Aa3/AA- 60 65 70 85 99 117 136A1/A+ 70 80 90 105 119 142 159A2/A 80 90 105 120 140 157 179A3/A- 90 100 110 130 150 176 196Baa1/BBB+ 105 115 128 145 165 186 208Baa2/BBB 120 130 140 160 180 201 221Baa3/BBB- 140 145 155 172 193 210 232Ba1/BB+ 225 250 275 300 325 350 440Ba2/BB 250 275 300 325 350 385 540Ba3/BB- 300 350 375 425 445 460 665B1/B+ 375 400 425 500 550 610 765B2/B 450 500 550 625 670 710 890B3/B- 500 550 650 750 875 975 1075Caa/CCC 600 650 800 900 1025 1150 1300

Source: bondsonline.com


Protection Against Default: Examples

� Collateral� Covenants� Subordination of future debt� Dividend restrictions� Sinking funds




Global Bonds


Key Dates in the Issuance of a Eurobond

Issuance need oropportunity identified

Announcement ofEurobond issue

Offering day:Eurobond issued

Closing day:Eurobonds delivered,

Issuer gets money

Issuerdiscussesdeal withleadmanager

Syndicateformed,bonds"presold"prior tofinal terms

Finalterms,bonds soldby sellinggroup toinvestors




Issuing a Bond: Key Players in the Issuance of a Eurobond

MANAGERSUNDER-

WRITERS

SELLINGGROUP


Underwriting Economics

Selling Concession

60%

Underwriting Fee20%

Management Fee20%

Management Fee: Normally shared equally among managers (may be subject to a praecipium for Global Coordinator or Lead Manager)

Selling Concession: Payable as a percentage of allocation (determined by book-runner)

Underwriting Fee: Based on underwriting commitment (often less expenses of offering)




Pricing and Fees

The Business� Telecoms� Dot-Coms� Avons(How much volatility?)

Debt

Equity

Fees

0.15%to1.5%

5% to7%

PricingT+SpreadL+Spread

Comparables/RatiosThe marketFuture cash flow

valuation

The Issuer


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?




Contact Info

Ian H. GiddyNYU Stern School of Business

Tel 212-998-0426; Fax 212-995-4233

[email protected]

http://giddy.org

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