The International Bond Market

The International Bond Market

Ravi Agarwal

Types of Bond Markets  Corporate  Government  Mortgage  Funding  Municipal

and agency

backed, asset backed, CDO.

Participants  Institutional

Investors

 Governments  Traders  Individuals

Types of Bonds

 Foreign  Global

Bonds

Bonds

 Eurobonds

Foreign Bonds Issued in a country's national bond market by an issuer not domiciled in that country where those bonds are subsequently traded and they are denominated in the domestic currency. There is no direct exchange rate exposure.

Types of Foreign Bonds  Yankee

bond in the US

 Samurai

bond in Japan

 Bulldog

bond in the UK

 Rembrandt

Bond in Spain

What lead to Global Bond / Eurobond ?  Introduction  Restricted

of Interest Equalization Tax.

financing of FDI by US

corporations  The

Glass-Steagall Act prevented US

commercial banks from issuing and dealing in bonds.

Global Bonds

Sold simultaneously on several markets in the currency of each market First offered by the World Bank, OntarioHydro, and Hydro-Quebec.

Eurobonds (part of Global Bond) A Eurobond is a bond issued and traded in a country other than the one in which its currency is denominated. A Eurobond does not necessarily have to originate or end up in Europe although most debt instruments of this type are issued by non-European entities to European investors.

Features 

Underwritten by international syndicate of banks.



Issued by MNEs, large domestic corporations, government and international institution.



Offered simultaneously in different capital markets.

Examples of Eurobond  Wal-Mart

issues bonds denominated in U.S. dollars on the German financial markets.

 The

French government issues eurodenominated bonds on the Japanese financial markets.

Why attractive ?  Absence  Less

of regulatory interference

stringent disclosure

 Favorable

Tax status

 Eurobonds

are rated by Moody’s , S&P just as its done in US markets

Market Composition  Issuer  Lead

and Co-Manager  Underwriter  Sellers  Trustees  Paying Agents

Types of Instruments  Straight

Fixed-Rate Issues (66%)

 Structured

Notes and Floating-Rate Notes

(32%)  Equity

Related Issues (2%)

Different options INSTRUMENT

INTEREST FREQUENCY

COUPON TYPE

CURRENCY PAYOFF

Straight fixed-rate

annual

Fixed

Currency of issue

Floating rate note

annual or quarterly

Variable

Currency of issue

Convertible bond

annual

Fixed

Currency of issue or convertible

Straight fixed-rate with annual equity warrants

Fixed

Currency of issue plus shares

Zero-coupon bond

none

Zero

Currency of issue

Dual-currency bond

annual

Fixed

Dual Currency

Composite currency bond

annual

Fixed

Composite currency

Selecting the Currency Coca-Cola wishes to raise $1 b. The company can issue dollars or pounds denominated bonds. Dollars (billions)

Pounds (billions)

Initial amount raised

1

1/S($)

Principal payment

[1+r($)]

n

n

[1+r(pounds)] /S

Coca-Cola will float the pound bond only if: [1+r($)]n > E[S] [1+r(pounds)]n /S Writing E[S] = S(1+d) n, where d is the expected annual rate of change in the exchange rate, Coca-Cola will float the pound bond only if:

r($) > r (pounds) + d

The Gray Market It is a forward market for overpriced Eurobonds Once the issue has been announced the seller might decide to re-sell the bonds immediately for forward delivery at 98-99% of par. This is an attempt to disguise the fact that the issue is overpriced.

Exemplification Issuer

Weyerhauser (1983)

Osaka Gas (1993)

Amount

$60 m

$250 m

Maturity

7 years

5 years

Coupon

11.5%

5.75%

Issue price

$100

$101.489

Listing

LuxSE

London

Total commission

1.875%

1.875%

Lead Manager

Morgan Stanley

Goldman Sachs

Gray market price

-1.5 to -1.25%

+ 0.25%

Onshore-Offshore Arbitrage: EXXON Capital Corporation, a subsidiary of EXXON Corporation

Date

Oct. 19,1984

October 1984

Type of security Issues $1.8 b Euro-discount bonds Buys $1.8 b of US T- bonds Maturity

November 15, 2004

November 15, 2004

yield

11.65%

11.825%

Net proceeds

+$ 198.6 m

-$181 m

Up-front arbitrage profit: $17.6 m

Pfandbriefe Market  German – –

mortgage-bond market

largest asset in European bond market and 6th largest in world bonds issued by mortgage banks in Germany  highly

regulated  bonds backed by mortgage pools so covered – no single case of insolvency in this market – –

public Pfandbriefe – loans to public sector entities mortgage Pfandbriefe – residential and commercial mortgages

Brady Bonds for emerging market  Bonds

that represent a restructuring of nonperforming bank loans of governments into marketable securities.  Brady bonds are made more attractive than the original debt as they carry an array of guarantees These bonds are then offered through international commercial banks.

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