copyright ©2003 ian h. giddy the global bond market 1 connexion: group questions 1. from the...

Copyright ©2003 Ian H. Giddy The Global Bond Market 1

Connexion: Group Questions

1. From the perspective of Connexion, what are their main objectives for this financing?

2. What would be the most appropriate product to offer Connexion?

3&10. How was the financing structured? 4. What issues come to mind regarding pricing? 5. How are the banks protected against risks? 6. After the loan is done, what are the main

benefits to the bank, Soc Gen? 7. What are the benefits to the other banks? 8. What could go wrong? 9. Soc Gen: how much profit?


Connexion loan

Tuesday: Bank and Bond Financing

Don Pedro Hydro

Westpac Eurobonds

Cap des Biches

The GlobalBond Market

Prof. Ian GIDDYStern School of Business

New York University


Case Study: Westpac Bond Financing

Why would Westpac issue a US dollar Eurobond?

Why has the bank issued other kinds of bonds? How would you explain the Eurobond issuance

process and costs to an issuer? What would be involved in getting a rating for

the company?


The International Capital Market

International bank financing Eurobonds, foreign bonds and global

bonds Project financing


Short-Term Financing: Evolution

INTERMEDIATED

DIRECT

ENHANCED

BANK LOANS

COMMERCIAL PAPER

BANK L/Cs


Alternative Sources ofShort-Term Financing

FINANCINGFINANCING

DEBT EQUITYDOMESTIC

LOANS

DOMESTIC

LOANSEUROMARKET

LOANS

EUROMARKET

LOANSSYNDICATED

EUROCREDITS

SYNDICATED

EUROCREDITSNOTE ISSUANCE

FACILITIES

NOTE ISSUANCE

FACILITIESEUROCOMMERCIAL

PAPER

EUROCOMMERCIAL

PAPER


Alternative Sources ofLong-Term Financing

FINANCINGFINANCING

DEBT EQUITY

Bank credits - syndicated

lending and facilities Bonds

Domestic, foreign, EuroPublic, privateStructured, such as principle-indexed notes

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


Long-Term Financing: Evolution

INTERMEDIATED

DIRECT

ENHANCED

BANK TERM LOANS

PUBLIC BONDS

BANK-GUARANTEED BONDS


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


Private Placements and Rule 144A

The private placement exemption from registration and disclosure is extended to Eurobonds as long as the U.S. investors meet the following requirements:They are large and sophisticatedThere are only a few investorsThey have access to information and analysis similar

to that which would ordinarily be contained in a registered offering prospectus

They are capable of sustaining the risk of losses, andThey intend to purchase the bonds for their own

investment portfolios, and not for resale.


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 form

But... Eurobonds usually influenced de facto by government

and banks of country of currency


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

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

SELLING

GROUP


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%

to

1.5%

5% to

7%

PricingT+Spread

L+Spread

Comparables/Ratios

The market

Future cash flow valuation

The Issuer


Case Study: Westpac Bond Financing

Why would Westpac issue a US dollar Eurobond?

Why has the bank issued other kinds of bonds?

How would you explain the Eurobond issuance process and costs to an issuer?

What would be involved in getting a rating for the company?


Westpac Bond Financing Goals

1. Diversification

- Currency - Retail and wholesale markets - Debt product types and maturity term - Debt investor types and location

2. Flexibility

3. Reduce cost and volatility

4. Global debt presence and performance


Westpac Ratings

Duration Short term Long Term Outlook

Fitch Ratings F-1+ AA- Stable

Moody's Investors Service

P-1 Aa3 Stable

Standard & Poor's

A-1+ AA- Stable

For senior unsecured debt obligations Westpac has been assigned

the following credit ratings:


Westpac Bond Financing

A$350m 10yr callable subordinated notes A$600m 5.5% 3 yr notes to Japanese

investors USD $500m 5.75% 5yr Eurodollar AA

notes GBP300m GBP Libor+0.10% 5-yr floating

rate note Eur500m Euribor+0.10% 5-yr FRN

copyright ©2003 ian h. giddy the global bond market 1 connexion: group questions 1. from the...

Documents

global bond market

global bonds

westpac bond financing

project financing slide

bonds domestic

domestic bonds

international bank financing

international bond markets