copyright ©2003 ian h. giddy the global bond market 1 connexion: group questions 1. from the...
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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?
Copyright ©2003 Ian H. Giddy The Global Bond Market 2
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
Copyright ©2003 Ian H. Giddy The Global Bond Market 4
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?
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
Copyright ©2003 Ian H. Giddy The Global Bond Market 6
Short-Term Financing: Evolution
INTERMEDIATED
DIRECT
ENHANCED
BANK LOANS
COMMERCIAL PAPER
BANK L/Cs
Copyright ©2003 Ian H. Giddy The Global Bond Market 7
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
Copyright ©2003 Ian H. Giddy The Global Bond Market 8
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
Copyright ©2003 Ian H. Giddy The Global Bond Market 9
Long-Term Financing: Evolution
INTERMEDIATED
DIRECT
ENHANCED
BANK TERM LOANS
PUBLIC BONDS
BANK-GUARANTEED BONDS
Copyright ©2003 Ian H. Giddy The Global Bond Market 10
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)
Copyright ©2003 Ian H. Giddy The Global Bond Market 11
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)
Copyright ©2003 Ian H. Giddy The Global Bond Market 12
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
Copyright ©2003 Ian H. Giddy The Global Bond Market 13
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
Copyright ©2003 Ian H. Giddy The Global Bond Market 14
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.
Copyright ©2003 Ian H. Giddy The Global Bond Market 15
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
Copyright ©2003 Ian H. Giddy The Global Bond Market 16
Pricing Bonds:The Yield Curve
bondsonline.com
Copyright ©2003 Ian H. Giddy The Global Bond Market 17
Benchmark Bonds
Copyright ©2003 Ian H. Giddy The Global Bond Market 18
Corporate Bonds: Spread over Benchmark
Copyright ©2003 Ian H. Giddy The Global Bond Market 19
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
Copyright ©2003 Ian H. Giddy The Global Bond Market 20
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
Copyright ©2003 Ian H. Giddy The Global Bond Market 21
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
Copyright ©2003 Ian H. Giddy The Global Bond Market 22
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
Copyright ©2003 Ian H. Giddy The Global Bond Market 23
Protection Against Default: Examples
Collateral Covenants Subordination of future debt Dividend restrictions Sinking funds
Copyright ©2003 Ian H. Giddy The Global Bond Market 24
Global Bonds
Copyright ©2003 Ian H. Giddy The Global Bond Market 25
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
Copyright ©2003 Ian H. Giddy The Global Bond Market 26
Issuing a Bond: Key Players in the Issuance of a Eurobond
MANAGERSUNDER-
WRITERS
SELLING
GROUP
Copyright ©2003 Ian H. Giddy The Global Bond Market 27
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)
Copyright ©2003 Ian H. Giddy The Global Bond Market 28
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
Copyright ©2003 Ian H. Giddy The Global Bond Market 29
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?
Copyright ©2003 Ian H. Giddy The Global Bond Market 30
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
Copyright ©2003 Ian H. Giddy The Global Bond Market 31
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:
Copyright ©2003 Ian H. Giddy The Global Bond Market 32
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 33