Corporate Finance Report

Corporate Finance Individual Assignment 2016
Table of Contents
1.0. Introduction...................................................................................................................................2
1.1. Overview of Maybank Group.......................................................................................................2
1.2. Maybank’s Position in the International Bond Market..............................................................2
1.2.1. Types of Bond Instruments Issued by Maybank Group.....................................................2
1.2.2. Reasons of bond issuance in the international bond market..............................................3
1.3. Maybank’s Position in the International Equity Market............................................................4
1.3.1. Types of Equity instrument Issuance by Maybank Group.................................................4
1.4.2. Reasons of equity issuance in the international equity market..........................................5
3.0. The recent and ongoing rise in the value of U.S. dollar..............................................................5
3.1. Defining a strong dollar.................................................................................................................6
3.2. Factors behind a strong dollar......................................................................................................6
3.3. Why there is an impact of a strong dollar on foreign exchange market?..................................6
3.4. Impact of a strong U.S. dollar on the local financial market......................................................7
3.4.1. Increasing purchasing power for U.S. citizens and less cost of imports.............................7
3.4.2. Causing U.S. foreign trade deficit and costly exports.........................................................7
3.4.3. Benefiting from U.S. equity market......................................................................................7
3.4.4. Differential impact across different States...........................................................................7
3.4.5. Generating negative returns in valuing a foreign asset.......................................................8
3.4.6. Reducing U.S. domestic growth............................................................................................9
3.4.7. Transaction exposure.............................................................................................................9
3.5. Impact of a strong U.S. dollar on the global financial market.................................................10
3.5.1. Negatively affecting on foreign currency market.............................................................10
3.5.2. Reducing the value of globally traded commodities..........................................................11
3.5.3. Higher returns from U.S. bonds in short-term international bond market.....................11
3.5.4. Distortion of international competition..............................................................................12
3.5.5. Impact on company valuation in emerging market...........................................................12
3.5.6. Impact on foreign equity market..............................................................................................12
3.5.7. Boosting a foreign currency exports...................................................................................13
3.5.8. Slower and lower emerging market growth.......................................................................13
4.0. Conclusion....................................................................................................................................13
Reference..................................................................................................................................................14
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1.0. Introduction
With the pace of globalisation, MNCs are spreading their global networks across border and engaging in
financial transactions in various international financial market such as, international bond market,
international equity (stock) market, international money market and international credit market.
Therefore, one of the Malaysian MNC, Maybank, has been chosen for the first part of this report to
analyse and present how it performs and uses financial markets on international platforms, especially the
international bond market and international equity market.
However, as noticed in the past few years, the U.S. dollar is rising in value; a strong U.S. dollar has
significant impact on U.S. market as well as a foreign market. Therefore, the second half of the report will
address and discuss in details the local and global impact of a strong U.S. dollar especially in relation to
financial market.
1.1. Overview of Maybank Group

Maybank Group, established 31st May, 1960, is now present in 19 countries 1 with a global network of
2,400 offices. With RM708.3 billion total assets, RM82 billion market capitalisation, 12.78 percent
common equity Tier 1 ratio and RM6.48 billion profit attributable to equity holders of the banks,
Maybank now is regarded as one of the top 20 strongest banks worldwide by Bloomberg Markets
magazine (Maybank Annual Report, 2015).
1.2. Maybank’s Position in the International Bond Market

Maybank retained its leadership position in the international global market in 2015, as it was ranked
Malaysian Top Lead Manager 2014 for the Corporate Sukuk Market and Corporate Bond Market, one of
the top three issuers for Bloomberg’s MYR Bond and Islamic Bond, ASEAN Local Currency Bond and
Borrower Loans Book Runner League table (Maybank Annual Report, 2015). Furthermore, the Group
was also ranked one of the top three underwriters of Sukuk worldwide in Bloomberg’s Global Sukuk
League table (Maybank Annual Report, 2015).
1.2.1. Types of Bond Instruments Issued by Maybank Group

Maybank’s bond issuance comprises of both conventional and Islamic bonds as well as listed and unlisted
bonds which are regarded as financial liabilities of the Group and placed under long-term liabilities and
debt securities. The following types of bond instruments are issued by Maybank in the international bond
market:
1
Malaysia, Indonesia, Singapore, Thailand, Cambodia, Vietnam, Laos, Philippines, Myanmar, Hong Kong, China,
Saudi Arabia, Bahrain, India, Pakistan, Uzbekistan, England, United States and Papua New Guniea.
2
 Preference Share (subordinated bond): Preference shares provide ownership opportunity to the
preference shareholder with a fixed preferential dividend rate. Upon Maybank’s liquidation, the
preference shareholders will have higher priority than common shareholders on the company’s
assets after bondholders. Maybank’s subordinated bonds are offered for a maturity period of 10-
20 years.
Maybank issues subordinated bonds in different names in the international bond market. For
example, the Group issued renminbi (RMB) bond (a type of subordinated bond) in Taiwan’s
Formosa bond market in 2015 (Hong, 2015). It also issued Rp500 billion worth of subordinated
bond in Jakarta bond market in the same year (Obor, 2016).
Maybank also issued the first and foremost Samurai bond outside Malaysian banking sector
which raised JPY (Japanese Yen) 31.3 billion in 2015. More specifically, the Group issued JPY
18.5 billion and JPY 12.8 billion worth of Samurai Bond on 30 th April, 2015 with a 3 and 5 years
maturity respectively (Maybank Annual Report, 2015). Among these two, the 3 years maturity
bond was issued in the Tokyo Pro-Bond Market. This has raised the Group’s liquidity ratio above
the minimum regulatory requirements set by Bank Negara Malaysia.
 Sukuk (Islamic subordinated bond): Sukuk does not only represents undivided shares of
ownership in Maybank’s assets, but generate fixed returns in a way that is compliant to Shariah
law. Maybank is the largest Sukuk issuer among the Malaysian MNCs. Nevertheless, the Islamic
subordinated bonds are issued at a profit rate of 4.48% with a rating AA1 by Rating Agency
Malaysia.
 Medium Term Notes (MTN): Maybank also issues medium-term notes for a maturity period of
5 years. Maybank issued RM10 billion bonds through its medium-term note (MTN) programme
which is rated AAA by Malaysian Rating Corp Bhd.
1.2.2. Reasons of bond issuance in the international bond market

Maybank issue both subordinated bonds and Islamic subordinated bonds (Sukuk) and other long-term
debt securities due to the following reasons.
Firstly, Maybank seeks to fund its working capital needs, general banking and other corporate purposes
through bond issuance.
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Secondly, Maybank also strives to maintain its bank’s capital adequacy ratio (CAR) as set by Bank
Negara Malaysia (BNM; in Malaysia) as well as central banks in other countries. For example, Maybank
plans to maintain a CAR within the range of 14 to 14.5% this year as required by BNM (Amianti, 2015).
Thirdly, Maybank attracts those types of investor who are risk-averse and like to invest their fund in a
diversified portfolio and with fixed rate of return.
Fourthly, being the Islamic finance hub, Malaysia has become the largest Sukuk market with 61.4
percent of the world’s Sukuk issuance and with an average of 21% growth rate since 2001 to 2008 (Bank
Negara Malaysia, 2009). This also attracts investors who are seeking for investing opportunity into new
and dynamic industry with substantial potentials.
Fifthly, by issuing subordinated bonds like Samurai bonds and RMB bonds, Maybank strives to retain its
presence in ASEAN as well as in Asian emerging market.
Sixthly, Maybank issues subordinated bonds, besides the equity capital, to optimise capital mix and
reduce overall cost of capital (Maybank Annual Report, 2015).
However, Maybank does not issue other types of bonds (i.e. commercial papers, floating-rate notes, bonds
with warrants, zero coupon bonds) because, (i) it does not find it attractive for investors as well as
bondholders, (ii) it believes to maintain its financial stability by issuing only aforementioned types of
bond instruments, (iii) by issuing the bonds discussed above, it can achieve its strategic goals as well as
assure a secured policy of fixed return to the bondholders.
1.3. Maybank’s Position in the International Equity Market

The Group raised US $4.3 billion from stock market of which US $400 million were accounted to
international stock market covering the major global market points of Maybank, especially across South
East Asian region. The Group was awarded the Best Equity House (for Maybank Kim Eng Thailand) by
Alpha Southeast Asia in 2015 (Maybank Annual Report, 2015).
1.3.1. Types of Equity instrument Issuance by Maybank Group

Common equity capital covers substantial part of the Group’s capital structure. Maybank Group raise
equity capital by issuing new ordinary shares that includes paid-up share capital, share premium, retained
profits, reserves and through IPOs (Initial Public Offerings).
 Issued Ordinary Share Capital: During the financial year ended 31 st December, 2015, the
Group raised issued and paid-up share capital of about RM443 million through issuance of about
4
17 million new shares under the “Employee Share Option Schemes” and RM426 million new
shares under the “Dividend Reinvestment Plan (DRP)” (Maybank Annual Report, 2015).
 Initial Public Offerings (IPOs): Maybank also raise common equity capital through IPOS. For
example, the Group also raised US $301.5 million IPO of Thailand’s Global Power Synergy and
US $159.4 million IPO of Platinum Group. Maybank also helped to raise US $46.4 million for
Industrial Trust in Singapore through primary placement (Maybank Annual Report, 2015).
1.4.2. Reasons of equity issuance in the international equity market

However, Maybank has been able to maintain the Group CET1 Capital Ratio, Group Tier 1 Capital Ratio
and Group Total Capital Ratio of 12.78%, 14.47% and 17.74% respectively at the end of the financial
year 2015 (See Figure 1) (Maybank Annual Report, 2015).
Maybank issues equity instruments mainly in order to maintain the Group Common Equity Tier 1 (CET1)
Capital Ratio, Group Tier 1 Capital Ratio and Group Total Capital Ratio required by the regulators, since
Maybank is required to maintain minimum Group CET1 Capital Ratio of 4.5%, Group Tier 1 Capital
Ratio of 6.0% and Group Total Ratio of 8.0%.
Figure 1: Maybank Group’s Capital Adequacy Ratio percentage in 2015 and 2014.
3.0. The recent and ongoing rise in the value of U.S. dollar
U.S. dollar is regarded as the most popular currency for trading in the foreign exchange market both in
and outside of U.S. More than 80% of international trade finance is settled in U.S. dollars, according to
the Society for Worldwide Interbank Financial Telecommunication (SWIFT) (Watt, et al. 2014).
According to Jones (2015), the U.S. dollar reached near its highest level since 2003 and again since 2014,
it was appreciated by more than 20 percent (See Figure 2).
Figure 2: The rise of dollar since 2010 till present time
5
3.1. Defining a strong dollar

A dollar is regarded strong when its value rises or strengthens in relation to one or more other currencies.
Nevertheless, a strong dollar is able to buy more units of a foreign currency than the previous time
(Federal Reserve Bank of Chicago, 1997).
3.2. Factors behind a strong dollar

The U.S. dollar strengthens due to several factors, such as, falling energy prices, strong performance by
U.S. economy, investors’ perception on dollar as “safe heaven”, little inflation, liquid currency markets
and stable return on investment for U.S. non-residents (Adams et al., 2015; Auboin, 2012).
3.3. Why there is an impact of a strong dollar on foreign exchange market?

Individuals, companies or government of a country other than U.S. that wants to buy U.S. products
require dollars, since all transactions are usually denominated in dollars. Dollar is, though not the only
currency being traded, one of the widely exchanged currency in the world followed by Japanese yen and
the German deutschmark (Federal Reserve Bank of Chicago, 1997).
6
3.4. Impact of a strong U.S. dollar on the local financial market

3.4.1. Increasing purchasing power for U.S. citizens and less cost of imports
As a strong dollar helps to import goods and oil in cheaper price, it keeps inflation low. As has
been noticed over the past years, with the rise of dollar in value, the crude oil prices fell
significantly which lowered down the price of gasoline and increased disposable income of U.S.
households (Profis & Dowding, 2015).
Moreover, considering the high value of U.S. dollars in other markets, the Americans are able to
travel abroad for vacation and purchasing foreign goods from those markets (especially, in
emerging markets) in cheaper price with very high purchasing power (Adams et al., 2015).
3.4.2. Causing U.S. foreign trade deficit and costly exports

As the dollar strengthens, the U.S. companies that export goods and services abroad face costly
exporting, since the foreign currency (currency of another regional market other than U.S. where
the goods and services are being exported) depreciate against U.S. dollar. The citizens of that
foreign market will tend to buy limited U.S. products causing a U.S foreign trade deficit (Profis &
Dowding, 2015).
3.4.3. Benefiting from U.S. equity market

The U.S. local companies selling their products and services locally benefit from a strong
position of the dollar. As with the rise in value for dollar, the inflation tends to lower down, the
prices of goods and services in the local equity market falls and customers with their higher local
purchasing power can buy more products.
Moreover, companies importing products or services from abroad also experience cheaper
transaction cost with reduced foreign exchange risk. U.S. companies that find cheaper imports
due to a strong dollar are utilities, consumer staples, healthcare and telecommunication (Profis &
Dowding, 2015).
3.4.4. Differential impact across different States

The rise in U.S. dollar not only impact on national economy and market, but also impact on
markets in different States in America distinctively. For example, a report released by Federal
Reserve Bank of Dallas have found that some indexes across States are more or less volatile than
the national index due to three main factors, such as, differences in the trade partners of these
States, degree of changes in the RTWD of a particular State and sensitivity of fluctuation in the
export of a State when U.S. dollar rises (Caranci & Busmeneva, 2015). As such, while there is a
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change of 1 percent in the national RTWD, the change in Florida and New York is reduced to
0.73 percent and 0.93 percent respectively (See Figure 3).
Figure 3: Impact of a strong dollar on different States of America
3.4.5. Generating negative returns in valuing a foreign asset

A strong U.S. dollar also has a direct impact on company profitability, especially for a U.S.
investor. While the U.S. dollar strengthens against a foreign currency, the assets denominated in
the foreign currency will translate into fewer dollars. It will make the U.S. investor assume that
the value the foreign asset has already fallen in value, even though the value in local currency
remains stable. For example, in 2014, the value of MSCI EAFE Index rose by 3.2 percent in local
currency terms, however, at the same time, the local currencies fell by 10.2 percent against U.S.
dollar. Subsequently, the U.S. investors experienced a negative return of 7.4 percent for that
index (Adams, et al., 2015).
3.4.6. Reducing U.S. domestic growth

An appreciating U.S. dollar depreciates economic growth due to decline in the net exports. Due to
high interest rates and stronger value of U.S. dollar, the U.S. goods and services in international
market became expensive and many customers did not tend to buy U.S. products due to
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expensive price causing net exports reduce at a high extent in the last two years 2014 and 2015
(See Figure 4) (Boxshall, Kupelian & Lambe, 2015).
Figure 4: Personal consumption, private investment, GDP, net exports and government investment
growth (1st Quarter of 2014 – 1st Quarter of 2015)
3.4.7. Transaction exposure

Transaction exposure occurs when a firm has revenue in one currency and expenses in another
currency. For instance, if a firm has revenue denominated in EUR and expenses in US dollar,
upon a rise in the value of US dollar against EUR, the earnings in US dollars will drop,
considering all other factors being equal (Zenner, Rocco & Chivukula, 2015).
On the contrary, a firm generating revenue denominated in USD and expenses in EUR will
experience completely opposite consequence, since the appreciation of US dollar will increase the
earnings of the firm in this case.
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3.5. Impact of a strong U.S. dollar on the global financial market

3.5.1. Negatively affecting on foreign currency market
As the U.S. dollar rises, the foreign currencies in most part of the world tends to decline.
However, this drop is not of same extent for all currency markets. Caplinger (2015) revealed that
by the end of 2015 since January 2015, the US dollar rose sharply against Brazilian real by
43.94%, Canadian dollar by 14.92%, Australian dollar by 14.82%, Euro by 12.86%, Indian rupee
by 4.89%, Chinese yuan by 2.72% and Japanese yen by 2.52% (See Figure 5). Thus, Asian
currencies were the most stable currencies followed by Canadian, Australian, European and
Brazilian currencies against a strong U.S. dollar.
Figure 5: U.S. Dollar to Foreign Currencies Exchange Rate (%)
Source: Author’s own drawing; information obtained from Caplinger (2015).
10
3.5.2. Reducing the value of globally traded commodities
A strong dollar may contribute to underperformance of commodities, since most globally traded
commodities are traded in U.S. dollars (See Figure 6). As due to the rise in value of U.S. dollar, it
takes fewer dollars to purchase a foreign commodity with lower exchange rate than dollar, the
prices fall down in the global marketplace causing foreign commodities drop in value that are
denominated in U.S. dollars (Profis & Dowding, 2015).
For example, a French company would like to import oil from Saudi Arabia, therefore, it will
require making payment in U.S. dollars since oil are globally traded in dollars. When Saudi
Arabia receives payment in U.S. dollars, it either converts the dollars into local currency (Riyal)
or invest them in U.S. assets (Jones, 2015).
However, when dollar appreciates against Euro, the cost of oil will be increasing by the same
amount, since the French company has to exchange Euro for dollars in order to import oil.
Nevertheless, the demand for oil may reduce due to rising cost of oil imports.
Figure 6: Underperformance of commodity market against U.S. dollars
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3.5.3. Higher returns from U.S. bonds in short-term international bond market
If a dollar starts to appreciate, the return on foreign bond continues to fall down to the return on
U.S. bonds, especially in developed countries where yields tend to be lower than in U.S. (Figure
7). The emerging economy countries may also continue to underperform U.S. bonds in a rising
U.S. dollar environment due to its high sensitivity to exposure of global slowdown (Jones, 2015).
Figure 7: Current 10-year yields in developed countries
3.5.4. Distortion of international competition

A strong dollar distorts the competitiveness of U.S. manufacturers in relation to foreign
manufacturers, since with the rise of U.S. dollar in value, people outside U.S. buy less U.S.
products which happened in early 1980s. In this situation, foreign producers (even) with limited
resources may be able to sell their products at lower price than U.S. products of quality resource
and higher price (Federal Bank of Chicago, 1997).
3.5.5. Impact on company valuation in emerging market

Although a strong dollar can improve the competitiveness in emerging market, the dramatic
movement of commodity prices and exchange rates have significantly impacted the market
valuation of many companies in this particular market. As such, many companies extensively
borrowed in international markets by converting their local currency borrowings into dollars
which placed them into experiencing balance sheet pressures (International Monetary Fund,
2015).
12
3.5.6. Impact on foreign equity market
U.S. companies would face impact on foreign sales, margins and profits whenever they translate
these amounts into dollars, during a continuous rise of U.S. dollar in value. For instance, an U.S.
exporter can keep the selling price either in foreign currency or in dollar terms, however, he will
face lower sales and profitability in both cases. Consequently, the U.S. exporter will experience
lower price due to the lower price in foreign currency. He will be facing lower profitability, if he
tries to reduce the price in order to adjust with foreign currency (Adams et al., 2015).
3.5.7. Boosting a foreign currency exports

A strong U.S. dollar can be beneficial for another currency with lower value. For example, if a
Canadian exporter sales goods and services into United States in U.S. dollar, it will incur costs in
the local currency, Canadian dollar. Therefore, he will have lower cost in local currency and
higher revenue from sales during a rising U.S. dollar (Profis & Dowding, 2015).
3.5.8. Slower and lower emerging market growth

A strong U.S. dollar leads to weaker growth rate of real GDP and real exchange rates in foreign
market. Moreover, along with weaker growth in emerging market during a U.S. dollar
appreciating cycle, the price of commodities also becomes weaker (Druck, Magud and Mariscal,
2015). The links are found to be coherent with markets of Latin America, emerging Asia, Middle
East and North Africa.
4.0. Conclusion
This paper address two separate issues; one of them addresses the strategies and performance of a MNC
(in this case, Maybank) in relation to two international financial markets, namely, international bond
market and international equity market; the other one addresses the impact of a strong dollar on local and
global financial markets.
Referring to the discussion in section 2.0, it is evident that Maybank is a successful brand-name in the
context of transacting in global financial market, especially in financial markets of ASEAN region,
besides its many other active market participation. Maybank mainly issues subordinated bonds in the
international bond market and common equity capital such as, issued and paid-up share capital in the
international equity market.
Referring to the discussion in section 3.0, a strong dollar though may have both positive and negative
effect on local and global financial market, it brings about more positive impact on the country, its
citizens, local investors and economic growth.
13
Reference
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Available from: https://www.abbotdowning.com/_asset/w2vl16/ADPerspectives-Spring-2015.pdf.
[Accessed 15th March, 2016]
Amianti, G. D. (2015). Maybank eyes Rp1.5 trillion from 2016 bond issuance. The Jakarta Post.
[Online]. Available from: http://www.thejakartapost.com/news/2015/12/02/maybank-eyes-rp-15-trillion-
2016-bond-issuance.html. [Accessed 17th March, 2016]
Auboin, M. (2012). Use of currencies in international trade: any changes in the picture? Economic
Research and Statistics Division Staff Working Paper. [Online]. Available from:
https://www.wto.org/english/res_e/reser_e/ersd201210_e.pdf. [Accessed 15th March, 2016]
Bank Negara Malaysia. (2009). Malaysian debt securities and Sukuk market: a guide for issuers and
investors. [Online]. Available from: http://bondinfo.bnm.gov.my/portal/server.pt?
open=514&objID=41920&parentname=CommunityPage&parentid=2&mode=2. [Accessed 15th March,
2016]
Boxshall, R., Kupelian, B. & Lambe, C. (2015). Will dollar denominated debt become an emerging
economy epidemic? Global Economy Watch. [Online]. Available from:
https://www.pwc.com/ee/et/publications/pub/global-economy-watch-may-2015.pdf. [Accessed 20th
March, 2016]
Caplinger, D. (2015). The strong dollar in 2015: where it’s hit the hardest. The Motley Fool. [Online].
Available from: http://www.fool.com/investing/general/2015/12/05/the-strong-dollar-in-2015-where-its-
hit-the-hardes.aspx. [Accessed 20th March, 2016]
Caranci, B. & Busmeneva, K. (2015). Strong dollar bites into exports, but impact varies by state. TD
Economics Special Report. [Online]. Available from:
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22nd March, 2016]
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Corporate Finance Individual Assignment 2016

1.1. Overview of Maybank Group

1.2. Maybank’s Position in the International Bond Market

1.2.1. Types of Bond Instruments Issued by Maybank Group

1.2.2. Reasons of bond issuance in the international bond market

1.3. Maybank’s Position in the International Equity Market

1.3.1. Types of Equity instrument Issuance by Maybank Group

1.4.2. Reasons of equity issuance in the international equity market

Figure 2: The rise of dollar since 2010 till present time

3.1. Defining a strong dollar

3.2. Factors behind a strong dollar

3.3. Why there is an impact of a strong dollar on foreign exchange market?

3.4. Impact of a strong U.S. dollar on the local financial market

3.4.2. Causing U.S. foreign trade deficit and costly exports

3.4.3. Benefiting from U.S. equity market

3.4.4. Differential impact across different States

Figure 3: Impact of a strong dollar on different States of America

3.4.5. Generating negative returns in valuing a foreign asset

3.4.6. Reducing U.S. domestic growth

3.4.7. Transaction exposure

3.5. Impact of a strong U.S. dollar on the global financial market

Figure 5: U.S. Dollar to Foreign Currencies Exchange Rate (%)

Source: Author’s own drawing; information obtained from Caplinger (2015).

Figure 6: Underperformance of commodity market against U.S. dollars

Figure 7: Current 10-year yields in developed countries

3.5.4. Distortion of international competition

3.5.5. Impact on company valuation in emerging market

3.5.7. Boosting a foreign currency exports

3.5.8. Slower and lower emerging market growth

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