1.

2.

3.

OFFSHORE MARKETS : They have - minimal regulations - no registration formalities - imp of rating varies - managing issues, underwriting done by banks in country of issue & investors are residents With deregulation, removal of barriers regulation of fin markets is not easy Common norms to be applied to reduce probability of systemic crises ex. BASEL Accord OECD countries apply uniform capital adequacy norms.

EUROMARKETS - Prior to 1980s, euro currency market was intl financial market of significance. - euro currency market- market located in Europe for lending & borrowing the worlds most convertible currency ($, pound sterling, DM, French franc, yen) - euro$ deposit is a deposit in a relevant currency with a bank outside home country of that currency Ex. US$ deposit with a bank in London DM deposit in Luxembourg It is interbank trading in time deposits, various debt instruments

Money = currency + deposits

Euro money= Eurocurrency + euro deposits Natl money becomes part of offshore currency when it is

transferred to a bank outside its monetary system Deposit is made in that part of banking structure not regulated by central bank of that country $ deposits in that segment of Bank of America which is governed by Intl Banking Facility. Euro bank- Fin inst bidding for time deposits and making loans in offshore market Offshore deposits are possible by taking physical currency out of the country & depositing in bank of another country when transferred to a bank outside natl monetary system

Features of Intl banking Unregulated mkts Greater risk Attract deposits at higher rates Provides loans at less rates

Reasons for growth of Euro mkts :

Unregulated fin intermediaries Bring together lenders & borrowers of same/ different countries. Substitute for domestic banking system Depositors getting higher int rates while borrowers get funds at low int rate.

Offshore banks have lower spread because they are unregulated institutions hence no need to maintain reserves Not subject to interest rate ceiling Take advantage of low taxes High degree of competitiveness, unrestricted entry force euro banks to keep small margins & low O.H costs. Subjected to less pressure from Govt to allocate credit to less profitable sectors. Are subjected to greater risk than domestic banks Interest rates set by competition as no regulatory authority Euro mkts & domestic mkts deal in same currency, linked thru arbitrage and strongly influenced by domestic rates

Location of bank is imp & not the ownership of bank or deposit. Intl. money markets- short term debt 1. Euro currency markets 2. Asian currency markets Intl. capital markets- long & medium debt 1. Euro bond markets 2. Asian bond markets Capital & money markets are interrelated, arbitrage & speculation takes place

DIFFERENCE BETWEEN EXCHANGE AND CURRENCY MARKETS Exchange marketsCurrencies are exchanged for one other at exchange rate Currency marketsCurrencies are borrowed & lent for varying maturities at interest rate . Currencies should be lent/ exchanged for - meeting trade & payment requirements - short/ long term needs of fixed or working capital - debt or other obligations

-DEALERS IN MARKET - Intl. banks/ Multinational banks - Foreign branches of domestic banks - merchant banks - other banks Euro currency markets are- wholesale in nature - highly flexible - competitive - well connected with wide network of brokers & dealers Is an intl market for borrowing capital by any countrys Govt., corporates, institutions - long term funds market organized by investment banks

FUNCTIONS OF EUROCURRENCY markets :-

1. Cheap source of W/C

- O/H costs are low - good credit rating - less cost of credit checking & processing - less lending rates as compared to domestic market 2. Liquidity - financial institutions find it very convenient & profitable to invest in euro markets due to --few restrictions, --can make investments in bearer securities, -- absence of tax withholding on interest and -- for short term

3. Facilitates intl. trade

--provides loans easily, facilitate intl. trade --due to low interest rates --easy procedural formalities

EUROBONDS Bonds underwritten by intl syndicate of banks Marketed internationally in countries other than the country of that denominated currency Not subjected to national restrictions Similar to domestic bonds in many respects Free of official regulations

Swap allows borrowers to raise money in one market & swap with interest rates of another Some borrowers are offering bonds whose value is weighted average of several currencies. Secondary market for Eurobonds is weak as there is no organized effort to create such market. Many commercial banks & securities trading firms act as market makers quoting two way price, getting hit on both sides equally is difficult which increases risk. Eurobonds retire with repurchase of bonds by issuer at pre decided price.

variants of Eurobonds Long term Medium term

short term

straight bond - Euro medium term - BA Bonds with options notes - CD Sinking fund bond - NIF - CP FRN Deep discount bonds Zero coupon bonds

LOAN SYNDICATION :loans are drawn by big borrowers like Govt & multinational firms. Its a procedure allowing a bank to diversify some of sovereign risk arising in intl banking 3 categories of banks in loan syndicate Lead banks Managing banks Participating banks

& co-managers Most of the loans are led by 1 or 2 banks who obtain mandate from borrower to raise funds Lead bank commits group to raise funds for borrower on specified terms & conditions

After obtaining mandate , they assemble banks to form mgt group who commit to provide entire loan if necessary Placement memorandum is prepared by lead banks Portion of loans are marketed to participating banks Lead banks responsibility is to market the loan, other members assist Participating banks can be selected in 3 different ways : 1. borrower may specify 2. lead bank may invite participants 3. select the bank on its own

Syndicated loan is term loan. Drawdown period:- period within which borrower can draw the loan. Repayment of loan is done within amortisation schedule & sometimes it starts immediately Sometimes entire repayment is done at maturitybullet loan Loan requiring repayment acc to amortisation schedule & larger final payment of principal on maturity- balloon repayment schedule Period prior to commencement of repayment grace period & can be negotiated.

1.

They are revolving credit type Greater flexibility in repayment Borrower has to pay fee on undrawn amt of credit line CHARGES ON SYNDICATED LOAN Front end fees-charges when loan is signed - in the range .5%-1% of loan -participation fees- .25%-.5% of entire amt Divided betn participating & lead bank -Management fees-lead bank takes premium while rest of mgt fees is divided among managing banks in proportion of
amt underwritten

2. 3.

Agents annual fee Reserve requirement clause: adjustment for increase in cost of funds

Charges on syndicated loans are: Annual payments=(LIBOR + spread)(TL)+ commitment fee (UDL) + Annual agents fee (if any)+ res. Requirement adj (if any) Front end fee- lead bank premium(TL) + participation fee + mgt fee + initial agents fee (if any) Longer maturity loan will have wider spread

ADVANTAGES OF LOAN SYNDICATION :

1. Intl loans are highly profitable for many banks 2. Many banks improved risk-return performance by diversification 3. Developing countries attempted to have high credit standing with intl banks 4. Safeguards like credit insurance prog, guarantees reduced the risk of intl lending.

DISADVANTAGES :1. 2. 3. 4. Country risk cant be exactly forecasted Dramatic increase in country risk Relaxation of credit stds. Critics doubt the ability of debtor countries to service their external debt

EURO BOND MKT: In this mkt, lenders lend directly to borrowers without intermediation of fin inst. They may be at floating rate or have currency conversion options They are underwritten by intl syndicate & distributed worldwide in bearer form Parties lend or borrow away from control of monetary authorities.

Offshore/ intl bonds are the bonds sold outside the country of the borrower 3 types of bonds :1. Foreign bonds-bonds issued in a mkt by a foreign entity , underwritten by syndicate of banks from that country, denominated in that currency 2. Parallel bonds-bonds issued by a borrower in many countries simultaneously raising funds in many currencies. 3. Euro bonds- bonds sold simultaneously in many countries other than the country of the currency in which the issue is denominated.

Euro bonds are direct claims on leading multinational cos, Govts or Govt enterprises.

 1.

KINDS OF EURO BONDS :STRAIGHT BONDS Fixed maturities & rate of interest Repaid by amortization (EMI- incl int+ principal) or in lumpsum at maturity date Interest paid at regular intervals Technically unsecured (secured by any property of borrower) In default , bond holders become general creditors Lenders consider- borrowers assets earning power gen credit strength Adv : int income is exempted from withholding tax

2. Convertible Euro bond : Convertibility option makes eurobonds more attractive & easily marketable Convertible into equity at certain premium above mkt price of equity on bond issue date. Investors are free to convert debt to equity at any time before conversion date Borrowing co. should issue new stock for that purpose Investors have steady income , can participate in rising stock prices

3. Bonds with warrants : Warrant is an option to buy a stated no. of common shares at a stated price during a prescribed period No dividends & voting rights Becomes worthless at expiry unless price of stock exceeds exercise price.

4. CURRENCY OPTION BONDS: Bond holder gets interest payment & principle in any specified currency Bond holder has the option to choose currency at pre determined exrate 5. CURRENCY BASKET BONDS: Have been developed to stabilize purchasing power of coupon by taking wtd avg Amt of each currency is stable but value of basket changes based on app/ dep of currencies

SHORT TERM INSTRUMENTS :1. EURO COMMERCIAL PAPERS : Unsecured , negotiable, cheap, flexible, short term loan issued by bank/ corp in intl money mkt denominated in currency other than domestic currency Adv- interest rate less than banks & issued by highly rated borrowers Disadv-secondary mkt not active so most investors hold till maturity

CERTIFICATE OF DEPOSIT: Issued by depository inst, negotiable, bearer form Some are regd, small denominations issued to retail investors Large denominations issued to inst investors exceeding 1 million

Junk bonds

Credit rating agencies assign rating based on credit risk assessment. These are high risk bonds & hence offer high yield. (high yield bonds). (3-4 % higher than Govt. issued bonds). Rated lower than Baa/ BBB & considered speculative, as compared to investment grade bonds. Investment grade used for bonds having high probability of being paid. Most common funds during 1980s, as firms required funds for various acquisitions & were reluctant to issue new share capital (equity), only was debt. Sometimes bonds initially investment graded bonds are downgraded to junk bonds due to credit risks faced by corporates. In US, 25% value of bonds are junk bonds.

Difference between Eurobonds and Euro credit

Eurobonds
1.

Euro credit

2.

3.

4.

5.

Cost of borrowing Issued in fixed & floating rate forms. Maturity Longer maturities. Size of issue Earlier small, rapidly expanding. flexibility Funds must be drawn in one sum on a fixed date. Repaid according fixed schedule prepaid with penalty. Speed More time required for documentation.

Interest is variable.

Shorter maturities. Tough competition. Can suit borrowers needs

Can be prepaid in full or half without penalty