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.OverviewHistorical Overview and Dimensions of the Eurobond MarketA First Stimulus to the Eurobond Market: The IETA Second Round of Stimulus to the Eurobond MarketThe Eurobond Market Endures10 - 3McGraw Hill / Irwin 2001 by The McGraw-Hill Companies, Inc. All rights reserved.OverviewRegulatory and Institutional Characteristics of the MarketRegulatory Bodies and Disclosure PracticesIssuing Costs, Ratings, and Exchange ListingsQueuing, Currency of Denomination, and Speed of OfferingThe Pros and Cons of Onshore and Offshore Markets10 - 4McGraw Hill / Irwin 2001 by The McGraw-Hill Companies, Inc. All rights reserved.OverviewIssuing Practices and Competitive Conditions in the Eurobond MarketA Brief Sketch of Eurobond UnderwritingTensions and Incentives within a Eurobond SyndicateThe Gray MarketEvidence of Competition among Eurobond Lead ManagersAnother Innovation: Global Bonds10 - 5McGraw Hill / Irwin 2001 by The McGraw-Hill Companies, Inc. All rights reserved.OverviewPricing EurobondsMarket Segmentation and the Pricing of EurobondsEurobonds and SecrecyEurodollar Bond PricesOnshore-Offshore Arbitrage OpportunitiesEurodollar Bond Prices: A General Model10 - 6McGraw Hill / Irwin 2001 by The McGraw-Hill Companies, Inc. All rights reserved.OverviewPolicy Matters - Private EnterprisesOnshore-Offshore Arbitrage Once Again: Exxon Capital CorporationUsing the Eurobond Market to Enhance the Value of the FirmPolicy Matters - Public PolicymakersThe U.S. Competitive ResponseEuropean Union and the Eurobond Market10 - 7McGraw Hill / Irwin 2001 by The McGraw-Hill Companies, Inc. All rights reserved.The Eurobond MarketThe 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 MarketA 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 MarketForeign 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 MarketThe 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$-bond market in London and Luxembourg.10 - 11McGraw Hill / Irwin 2001 by The McGraw-Hill Companies, Inc. All rights reserved.Historical Overview and Dimensions of the Eurobond MarketIn 1965 and 1968, further policy measures were taken to limit the direct foreign investments made by U.S. corporations.These programs effectively forced U.S. multinationals offshore to meet the financing needs for their foreign projects.When the stimulating U.S. regulations were scrapped in 1974, the Eurobond market volume first collapsed and then grew steadily, before surging during the 1980s.10 - 12McGraw Hill / Irwin 2001 by The McGraw-Hill Companies, Inc. All rights reserved.Historical Overview and Dimensions of the Eurobond MarketNow, the annual volume of new issues often nears or surpasses the annual volume of new U.S. corporate bond issues.Increasingly too, Eurobonds have been issued in currencies other than the US$, 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
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