Tuesday Bank and Bond Financing Connexion loan Cap
Tuesday: Bank and Bond Financing Connexion loan Cap des Biches Don Pedro Hydro Westpac Eurobonds Copyright © 2003 Ian H. Giddy Global Banking and Lending
Cap des Biches: Choices for the BCEAO Foreign-exchange intervention l Money-market intervention (consider interaction with monetary policy) l Fiscal policy--the demand side l Tariffs and subsidies l Exchange controls and capital controls (and jawboning) l Copyright © 2003 Ian H. Giddy Global Banking and Lending
Cap des Biches: Choices for GTI-Dakar “We must decide whether it’s worth covering our dollar exposure, given the forward premium and relative interest rates. ” Copyright © 2003 Ian H. Giddy Global Banking and Lending
Cap des Biches: Choices for GTI-Dakar “We must decide whether it’s worth covering our dollar exposure, given the forward premium and relative interest rates. ” What is the probability of a devaluation? n How much? n What should GTI-Dakar do? n Copyright © 2003 Ian H. Giddy Global Banking and Lending
Cap des Biches: Choices for GTI-Dakar n n n Renegotiate the $30 million loan, replacing it with a loan denominated in Euros Keep the USD loan in place, but enter into a 6 -year currency swap to effectively convert GTI's payments into Euros. Hedge the dollar-Euro risk by buying dollars forward, with rolling 3 -month forward contracts Hedge against a possible devaluation of the CFA franc, by selling francs in the 3 -month forward market. Leave the dollar loan unhedged, and pass the cost of any foreign exchange losses on to Senelac, the buyer of GTI's power Do nothing now but watch the situation carefully and hedge if the risk becomes too great. Copyright © 2003 Ian H. Giddy Global Banking and Lending
Global Banking: Strategy & Techniques Prof. Ian GIDDY Stern School of Business New York University
Products or Customers? Corporate Finance Sales Customer-Driven Innovation Capital Markets Copyright © 2003 Ian H. Giddy Global Banking and Lending
Products offered Client-Arena-Product Matrix Markets covered Clients served Copyright © 2003 Ian H. Giddy Global Banking and Lending
Products Credit products l Trading and positioning l Risk management products l Financial engineering and structured finance l Underwriting and distribution l Asset management l Retail and private client services l Transactions services l Copyright © 2003 Ian H. Giddy Global Banking and Lending
Alternative Bank-Industry Linkages The Equity. Market System The Bank. Based System The Bank. Industrial Crossholding System Individuals Banks Investment Vehicles Industrial Companies Individuals Banks / Investment Vehicles & Insurance Industrial Companies Individuals Banks Investment Vehicles & Insurance Industrial Companies The Statecentered System Banks / Investment Vehicles & Insurance State Institutions Industrial Companies Copyright © 2003 Ian H. Giddy Individuals Industrial Companies Global Banking and Lending
Product Profitability Cycle Excess returns Time Copyright © 2003 Ian H. Giddy Global Banking and Lending
Client-Arena-Product Matrix Products offered Build versus buy? Markets covered Clients served Copyright © 2003 Ian H. Giddy Global Banking and Lending
Client-Arena-Product Matrix Products offered Deutsche Bank in USA Markets covered Clients served Copyright © 2003 Ian H. Giddy Global Banking and Lending
Client-Arena-Product Matrix Products offered Sell? Markets covered Clients served Copyright © 2003 Ian H. Giddy Global Banking and Lending
Complementarity and Cross-Selling Insurance Retail Citigroup? Wholesale Asset Management Copyright © 2003 Ian H. Giddy Global Banking and Lending
Products offered Client-Arena-Product Choices for West Afrtican Banks? ? Markets covered Clients served Copyright © 2003 Ian H. Giddy Global Banking and Lending
International Bank Financing Prof. Ian Giddy New York University
International Banking and Credit l l l l International Banking and the Eurocurrency Market The Separability of Pricing from Commitment Periods The Syndication Technique in International Lending Transferability and Trading of Loans Note Issuance Facilities Euro-commercial Paper Floating-rate Notes Copyright © 2003 Ian H. Giddy Global Banking and Lending
Interest-Rate Parity $1 (1 + i E$) = ($1/ S t )(1 + i. EBP) Fnt where St is the spot exchange rate (dollars per British Pound) and Fnt is the forward rate. Or, to a close approximation, (i. E$ - i. EBP) = [(Fnt - St)/St] (365/n) 100 Interest-rate differential = forward premium or discount Copyright © 2003 Ian H. Giddy Global Banking and Lending
Asset-Liability Management Assets Loans n n Copyright © 2003 Ian H. Giddy Floating rate Fixed rate Liabilities Deposits n Short term n Long term Global Banking and Lending
Asset-Liability Management Assets Liabilities Loans n n Copyright © 2003 Ian H. Giddy Floating rate Fixed rate “Bought money” Global Banking and Lending
Asset-Liability Management Assets Loans n n Copyright © 2003 Ian H. Giddy Floating rate Fixed rate Liabilities Active money market trading Global Banking and Lending
Loan Pricing: Basis and Margin Assets Loans n Copyright © 2003 Ian H. Giddy Prime rate Liabilities Domestic deposits Global Banking and Lending
Loan Pricing: Basis and Margin Assets Prime rate Domestic deposits Libor-based Wholesale deposits Loans n Copyright © 2003 Ian H. Giddy Liabilities Global Banking and Lending
Transferability of Loans and Off. Balance Sheet Banking Copyright © 2003 Ian H. Giddy Global Banking and Lending
The Syndication Technique in International Lending l l l Syndication is the underwriting and distribution of large bank loans, a distribution method adapted from the securities underwriting business Risk reduction in syndicated loans: 1. Credit analysis 2. Monitoring and control 3. Taking a smaller amount of more, diversified assets 4. Relying on the monitoring role of the lead bank or banks. Better information about 1. Aggregate amount of lending to any one borrower (especially a country) 2. Terms and conditions of other segments of the loan and of other lending to the same borrower. Copyright © 2003 Ian H. Giddy Global Banking and Lending
Trading and Transferring Loans ASSIGNMENT PARTICIPATION FULL ASSIGNMENT PARTICIPATION The sale of all of the originating lender’s or assignor’s rights and interest in a credit facility to a purchaser or assignee. Participants have derivative rights, not direct rights against (or obligations to) the borrower. ASSIGNMENT WITH NOVATION Copyright © 2003 Ian H. Giddy n n n LIMITED VOTING PARTICIPATION FULL PASS-THROUGH PARTICIPATION Global Banking and Lending
Trading and Transferring Loans ASSIGNMENT PARTICIPATION FULL ASSIGNMENT PARTICIPATION Participants have derivative rights, The sale of all of the originating not direct rights against lender’s or assignor’s (or obligations to) the borrower. rights and interest in a credit facility In a full assignment: l to a purchaser or assignee. The borrower usually acknowledges the assignment l l l The borrower must consent to release of obligation by the assignor The assignee has direct access and enforcement of rights against the borrower n LIMITED VOTING PARTICIPATION The loan agreement and note is transferred to assignee at closing ASSIGNMENT WITH NOVATION Copyright © 2003 Ian H. Giddy n n FULL VOTING PARTICIPATION FULL PASS-THROUGH PARTICIPATION Global Banking and Lending
Trading and Transferring Loans ASSIGNMENT PARTICIPATION FULL ASSIGNMENT PARTICIPATION Participants have derivative rights, The sale of all of the originating not direct rights against lender’s or assignor’s In a participation: (or obligations to) the borrower. rights and interest in a credit facility l The lead bank sells the right to participate in a credit facility or loan to a purchaser or assignee. l Participants have derivative rights, not direct rights against (or obligations to) the borrower l Counterparty risk exists for lead bank n LIMITED VOTING PARTICIPATION (eg lead bank responsible for funding participants’ shares) ASSIGNMENT n FULL VOTING PARTICIPATION l Capital rules may affect lead bank WITH NOVATION Copyright © 2003 Ian H. Giddy n FULL PASS-THROUGH PARTICIPATION Global Banking and Lending
The Separability of Pricing from Commitment Periods l l l The Eurocurrency market permits the separation of the currency of denomination from the country of jurisdiction. A seemingly simple loan has inherent a large number of different features and aspects of risk, including upricing (over short-term LIBOR) ucommitment (medium term) ufunding the loan International bankers isolate these features in order to distribute and to hedge the inherent risks Copyright © 2003 Ian H. Giddy Global Banking and Lending
The International Money Markets Source: ft. com Copyright © 2003 Ian H. Giddy Global Banking and Lending
Pricing a Loan to BHP What maturity and currency do they want to borrow? What is the credit quality of this borrower? USD Get USD Libor as cost-of-funds proxy A- Set an appropriate spread over Libor Price the loan Copyright © 2003 Ian H. Giddy Global Banking and Lending
Pricing a Loan to BHP USD Get USD Libor as cost-of-funds proxy A- Set an appropriate spread over Libor www. marketprices. ft. com/markets/currencies/money Price the loan pages. stern. nyu. edu/~adamodar/New_Home_Page/datafile/ratings. htm Copyright © 2003 Ian H. Giddy Global Banking and Lending
Funding the Australian Loan Three ways to fund: l Take domestic Aussie dollar deposit l Take Euro. A$ deposit Copyright © 2003 Ian H. Giddy 3 MO A$ DEP Global Banking and Lending
Funding the Australian Loan Three ways to fund: l Take domestic Aussie dollar deposit l Take Euro. A$ deposit l Fund with dollars, hedged into Aussies 3 MO E$ FX DEP SWAP l Take E$ deposit l Do FX swap: sell USD spot, buy USD forward Copyright © 2003 Ian H. Giddy Global Banking and Lending
Raising the Money: Note Issuance Facilities A Note Issuance Facility has two tiers l Tender panel members (who provide funds) l Underwriters (commit to the availability of credit) Copyright © 2003 Ian H. Giddy Global Banking and Lending
A Revolver RUF Structure: u. Arranger u. Underwriting banks u. Tender panel u. Agent Copyright © 2003 Ian H. Giddy Global Banking and Lending
Laura Ashley Need lots of money fast? Have trouble accessing CP market? Confident of always being able to access the short-term market? YES Arrange syndicated credit YES Arrange Euronote program NO Don’t issue paper YES Borrow from banks Arrange RUF or MOF: Underwritten Euronote program Need funds? Cannot sell paper at L+10 bp? Issue Euronotes or other paper Copyright © 2003 Ian H. Giddy Global Banking and Lending
Comparison of RUF to Put Option Gain or loss relative to having no underwritten facility + - "STRIKE PRICE" Borrower issues Euronotes Copyright © 2003 Ian H. Giddy FEES 0 LIBOR FLAT Market spread relative to LIBOR at which the borrower can issue short term paper. CAP SPREAD Borrower draws on underwritten facility Global Banking and Lending
Euro-commercial Paper l l ECP is an unsecured promissory note, issued and placed outside the jurisdiction of the currency of denomination. A Eurocommercial paper facility u By definition, the facility provides only for the best-efforts auction of paper; the borrower has no underwritten assurance of availability of funds u Today, most committed facilities are used by those who want a medium term back-up line on which they do not intend to draw--often to back up a U. S. commercial paper facility. u Uncommitted Euro-commercial paper or U. S. commercial paper facilities are used for actually raising funds. Copyright © 2003 Ian H. Giddy Global Banking and Lending
International Bank Lending DOMESTIC LOANS Copyright © 2003 Ian H. Giddy Global Banking and Lending
International Bank Lending DOMESTIC LOANS EUROMARKET LOANS Copyright © 2003 Ian H. Giddy Global Banking and Lending
International Bank Lending DOMESTIC LOANS EUROMARKET LOANS SYNDICATED EUROCREDITS Copyright © 2003 Ian H. Giddy Global Banking and Lending
International Bank Lending DOMESTIC LOANS EUROMARKET LOANS SYNDICATED EUROCREDITS NOTE ISSUANCE FACILITIES Copyright © 2003 Ian H. Giddy Global Banking and Lending
International Bank Lending DOMESTIC LOANS EUROMARKET LOANS SYNDICATED EUROCREDITS NOTE ISSUANCE FACILITIES EUROCOMMERCIAL PAPER Copyright © 2003 Ian H. Giddy Global Banking and Lending
Case Study: Connexion Would you advise Connexion to use a syndicated loan to finance its prospective acquisition? l If so, how would it be structured and distributed? l How should the bank evaluate and price the risk? l Copyright © 2003 Ian H. Giddy Global Banking and Lending
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? Copyright © 2003 Ian H. Giddy Global Banking and Lending
Tuesday: Bank and Bond Financing Connexion loan Cap des Biches Don Pedro Hydro Westpac Eurobonds Copyright © 2003 Ian H. Giddy Global Banking and Lending
Copyright © 2003 Ian H. Giddy Global Banking and Lending
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