International Financial MarketsOverviewSlide 3Slide 4Slide 5Slide 6The Eurobond MarketSlide 8Slide 9Historical Overview and Dimensions of the Eurobond MarketSlide 11Slide 12Comparative Characteristics of Bond Issues in the International Bond MarketSlide 14Slide 15Structure of a Eurobond SyndicationSlide 17Tensions and Incentives within a Eurobond SyndicateSlide 19Slide 20The Gray MarketEvidence of Competition Among Eurobond Lead ManagersAnother Innovation: Global BondsSlide 24Pricing EurobondsSlide 26Slide 27Eurodollar Bond PricesOnshore-Offshore Arbitrage OpportunitiesEurodollar Bond Prices: A General ModelPolicy Matters - Private EnterprisesSlide 32Policy Matters - Public PolicymakersSlide 34Slide 35The Eurobond Market10 Prices and PoliciesSecond Edition ©2001Richard M. LevichInternational Financial MarketsMcGraw Hill / Irwin10 - 2McGraw Hill / Irwin 2001 by The McGraw-Hill Companies, Inc. All rights reserved.OverviewHistorical Overview and Dimensions of the Eurobond MarketA First Stimulus to the Eurobond Market: The IETA Second Round of Stimulus to the Eurobond MarketThe Eurobond Market Endures10 - 3McGraw Hill / Irwin 2001 by The McGraw-Hill Companies, Inc. All rights reserved.OverviewRegulatory and Institutional Characteristics of the MarketRegulatory Bodies and Disclosure PracticesIssuing Costs, Ratings, and Exchange ListingsQueuing, Currency of Denomination, and Speed of OfferingThe Pros and Cons of Onshore and Offshore Markets10 - 4McGraw Hill / Irwin 2001 by The McGraw-Hill Companies, Inc. All rights reserved.OverviewIssuing Practices and Competitive Conditions in the Eurobond MarketA Brief Sketch of Eurobond UnderwritingTensions and Incentives within a Eurobond SyndicateThe Gray MarketEvidence of Competition among Eurobond Lead ManagersAnother Innovation: Global Bonds10 - 5McGraw Hill / Irwin 2001 by The McGraw-Hill Companies, Inc. All rights reserved.OverviewPricing EurobondsMarket Segmentation and the Pricing of EurobondsEurobonds and SecrecyEurodollar Bond PricesOnshore-Offshore Arbitrage OpportunitiesEurodollar Bond Prices: A General Model10 - 6McGraw Hill / Irwin 2001 by The McGraw-Hill Companies, Inc. All rights reserved.OverviewPolicy Matters - Private EnterprisesOnshore-Offshore Arbitrage Once Again: Exxon Capital CorporationUsing the Eurobond Market to Enhance the Value of the FirmPolicy Matters - Public PolicymakersThe U.S. Competitive ResponseEuropean Union and the Eurobond Market10 - 7McGraw Hill / Irwin 2001 by The McGraw-Hill Companies, Inc. All rights reserved.The Eurobond MarketThe Eurobond market is the market for long-term debt instruments issued and traded in the offshore market.Like the Eurocurrency market, differences in national regulation helped developed the Eurobond market, while increasing capital mobility and greater ease in telecommunications enabled it to flourish.10 - 8McGraw Hill / Irwin 2001 by The McGraw-Hill Companies, Inc. All rights reserved.The Eurobond MarketA Eurobond is offered for sale simultaneously in a number of countries.A domestic bond is an obligation of a domestic issuer, underwritten by a syndicate of domestic investment banks, denominated in domestic currency, and offered for sale in the domestic market.A foreign bond is similar to a domestic bond except that the issuer is a foreign entity.10 - 9McGraw Hill / Irwin 2001 by The McGraw-Hill Companies, Inc. All rights reserved.The Eurobond MarketForeign bonds are called Yankee bonds in the U.S. market, Samurai bonds in the Japanese market, and Bulldog bonds in the U.K. market.10 - 10McGraw Hill / Irwin 2001 by The McGraw-Hill Companies, Inc. All rights reserved.Historical Overview and Dimensions of the Eurobond MarketThe Interest Equalization Tax (IET) of 1963 taxed purchases of foreign stocks and bonds issued or trading in the United States.The IET was proposed as a temporary measure to reduce U.S. capital outflows and take pressure off the U.S. balance of payments. However, it effectively closed down the Yankee bond market, and induced foreign borrowers to migrate offshore and set up a US$-bond market in London and Luxembourg.10 - 11McGraw Hill / Irwin 2001 by The McGraw-Hill Companies, Inc. All rights reserved.Historical Overview and Dimensions of the Eurobond MarketIn 1965 and 1968, further policy measures were taken to limit the direct foreign investments made by U.S. corporations.These programs effectively forced U.S. multinationals offshore to meet the financing needs for their foreign projects.When the stimulating U.S. regulations were scrapped in 1974, the Eurobond market volume first collapsed and then grew steadily, before surging during the 1980s.10 - 12McGraw Hill / Irwin 2001 by The McGraw-Hill Companies, Inc. All rights reserved.Historical Overview and Dimensions of the Eurobond MarketNow, the annual volume of new issues often nears or surpasses the annual volume of new U.S. corporate bond issues.Increasingly too, Eurobonds have been issued in currencies other than the US$, and then combined with a currency swap to achieve lower cost funds in US$, etc.At the same time, the market has grown in terms of bond maturities, issue size, and secondary market trading.10 - 13McGraw Hill / Irwin 2001 by The McGraw-Hill Companies, Inc. All rights reserved.Comparative Characteristics of Bond Issues in the International Bond MarketRegulatoryBodiesSecuritiesand Exchange CommissionOfficial agency approvalMinimum regulatory controlU.S. Market Non-U.S. Market Eurobond MarketDisclosurerequirementsMore detailed• High initial and ongoing expense• Onerous to non-US firmsVariable Determined by market practicesIssuing costs 0.75-1.00% Variable to 4.0% 2.0-2.5%Rating requirementsYes Usually not No, but commonly done10 - 14McGraw Hill / Irwin 2001 by The McGraw-Hill Companies, Inc. All rights reserved.Comparative Characteristics of Bond Issues in the International Bond MarketExchange listingUsually not listed Listing is usual Listing is usualU.S. Market Non-U.S. Market Eurobond MarketQueuing No queue Queuing is commonNo queueCurrency of denomination restrictionsUnited States does not restrict the use of US$Part of queuing• Many countries have in the past or now restrict use of currencyNo restrictions on use of US$ or C$Speed of issuanceRelatively slow until Rule 415 on shelf