Raising Debt Globally
The international debt markets offer the borrower a variety of different maturities, repayment structures, and currencies of denomination. The markets and their many different instruments vary by source of funding, pricing structure, maturity, and subordination or linkage to other debt and equity instruments. Exhibit 14.9 provides an overview of the three basic categories described in the following sections, along with their primary components as issued or traded in the international debt markets today. As shown in the exhibit, the three major sources of debt funding on the international markets are the international bank loans and syndicated credits, euronote market, and international bond market. EXHIBIT 14.9 International Debt Markets and Instruments Bank Loans and Syndications International Bank Loans.
International bank loans have traditionally been sourced in the eurocurrency loan markets. Eurodollar bank loans are also called “eurodollar credits” or simply “eurocredits.” The latter title is broader because it encompasses nondollar loans in the eurocurrency loan market. The key factor attracting both depositors and borrowers to the eurocurrency loan market is the narrow interest rate spread within that market. The difference between deposit and loan rates is often less than 1%. Eurocredits. Eurocredits are bank loans to MNEs, sovereign governments, international institutions, and banks denominated in eurocurrencies and extended by banks in countries other than the country in whose currency the loan is denominated. The basic borrowing interest rate for eurocredits has long been tied to the London Interbank Offered Rate (LIBOR), which is the deposit rate applicable to interbank loans within London. Eurocredits are lent for both short- and medium-term maturities, with maturities for six months or less regarded as routine. Most eurocredits are for a fixed term with no provision for early repayment. Syndicated Credits. The syndication of loans has enabled banks to spread the risk of large loans among a number of banks. Syndication is particularly important because many large MNEs need credit in excess of a single bank’s loan limit. A syndicated bank credit is arranged by a lead bank on behalf of its client. Before finalizing the loan agreement, the lead bank seeks the participation of a group of banks, with each participant providing a portion of the total funds needed. The lead bank will work with the borrower to determine the amount of the total credit, the floating-rate base and spread over the base rate, maturity, and fee structure for managing the participating banks. There are two elements to the periodic expenses of the syndicated credit: 1. Actual interest expense of the loan, normally stated as a spread in basis points over a variable-rate base such as LIBOR 2. Commitment fees paid on any unused portions of the credit—the spread paid over LIBOR by the borrower is considered the risk premium, reflecting the general business and financial risk applicable to the borrower’s repayment capability Euronote Market
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- Fall '16
- Debt, Stock exchange