Long term sources of

financing in International
financial markets
 Why International market??
 Diversify investor base (by both type of institution and
geographic location)
- Saturation of limits with the Indian long-term investors
- Increase in funding costs
 Profile building (both international and among peer group)
 Flexibility in terms of shifting between fixed/floating rates
and switching between currencies
 Lower administrative time required for debt servicing
 Refinance existing debt at competitive cost
 Lengthen debt maturity profile -10 years and longer
 Create benchmark for future capital markets’ financing
 International Bonds
• Those bonds, which are initially sold outside
the country of borrower.
 EURO BOND
• Euro bond refers to the bonds issued and sold outside the home
country of the currency of issue.
• These bonds are issued in international market and denominated in
hard currency i.e. dollar, yen, pound, euro.
• They are bearer securities, the names of the bearer are not
registered anywhere.
• Unsecured debt securities maturing at least a year after launch.
• Long-term loans usually having a maturity period between 5 years
to 30 years. Nowadays euro bonds have a maximum maturity
period of 10 years
• The euro bonds may be fixed or floating rate bonds.
• Borrowing not subject to domestic regulations especially exchange
controls, which may limit their ability to export capital gains.
Eurobond Market - Characteristics
• Maturity - Up to 10 years
• Investors - Widespread institutional and retail investor
base outside the U.S.
• Pricing - Priced over benchmark U.S. Treasuries. Pricing
spread is generally wider for institutional investors
• Liquidity - Potentially good if well syndicated and
distributed
• Ratings - Advisable but not necessary
• Documentation - Standard Euromarket
• Disclosure - Sufficient to meet London or Luxembourg
Stock Exchange requirements
• Timing - 4-6 weeks
Euro Bonds
Eurobonds - Indicative pricing example 1
Issuer NTPC Limited
Issue Size US$300,000,000
Issue Format Reg S Eurobond
Issue Ratings BB+ Stable (S&P) /
BB+ Stable (Fitch)
NTPC Limited Reoffer Spread 10-year UST +
140bp
Coupon 5.875% (semi-
US$300 Million Bonds due 2016 annual)
Reoffer Yield 5.939%
Reoffer Price 99.523%
Joint Bookrunner Listing Singapore
Barclays Capital Governing Law English
Pricing Date 23 February 2006
Settlement Date 2 March 2006
Maturity Date 2 March 2016
 Foreign Bonds
• A bond issued by a company in Country A in the
markets of Country B in Country B’s currency.
• Country B = ?
– US: Yankee Bonds
– Netherlands: Rembrandt Bonds
– Japan: Samurai Bonds
– UK: Bull Dog Bonds
• These bonds are different from Euro bonds in the
sense that they are governed by the regulations
of the country in which they are issued whereas
Euro bonds are not.
 Advantages of Yankee Bonds
• Yankee bonds are that the longer maturities
of bonds place them outside the ECB ceiling.
• Yankee bond markets are extremely deep and
liquid
• Funds are available at low interest rates for
long maturity periods.
Equity Market
 What is ADR?
• Certificates that represent shares of a foreign
stock owned and issued by a U.S bank
• They buy up shares of the foreign stock and
repackage them into securities which can be
traded on the NYSE, NASDAQ or AMEX.
• The foreign shares are usually held in custody
overseas, but the certificates trade in the U.S.
• They provide easy access to gaining international
equities exposure without actually having to
exchange currencies and open additional accounts
to transact in overseas
 TYPES OF ADR
• Level 1 – Basic, common, traded on OTC, least
regulation, no US accounting standard, no annual
reports

• Level 2 – Listed on stock exchange, higher

trading volumes

• Level 3 – Most rigorous regulations, go as far as

raising capital from US investors
 How to price ADR
• Each ADR represent a single share, a fraction
of shares or multiple shares.
• The depository bank sets the ratio of US
ADRS per home country share. Ratio can be
=1,<1 and >1
• Once ADR priced & sold in the market, its
price moves based on the market conditions
 ADR: Companies/Shareholder's perspective

Advantages Disadvantages
• Limited selection
• Cost Effective
• Liquidity
• Hassle Free
• Exchange rate risk
• Ease of Usage
• Limited Diversification
• Risk Diversification
• Protection of Ownership
 Summary of the Infosys ADRs issued

Issue Day Stock Amount ADR: % of Share in Actual

Exchange Mobilized Domestic ADR form Price/share($)
($ Million) Share
1.03.1999 NASDAQ     68
 
  70.4 2:1  
 
30.07.2003     49
 
  294 1:1  
 
09.05.2005     67
 
  1050.13 1:1  
 
21.11.2006      
 
  1605 1:1 53.5
19.11*
* % of share in the form of ADRs as on March 31, 2007
Reasons why ADR’s was overpriced

• Excess demand with limited supply of ADR’s.

• Few opportunities in the US to invest in
companies that are growing at the 20–30% rates
• Official barriers prevent foreign investors from
buying the shares trading in India
• Returns are negatively correlated with other
assets held by them.
• ADR’s provides a value added layer –
transparency, liquidity and greater coverage than
the existing Indian stock.
Return Behavior :INFY ADS vs. NASDAQ vs.
Infosys Tech
 GDR- Global Depositary Receipts
• GDR is a certificate issued by a depository bank, which
purchases shares of foreign companies and deposits it
on the account.
• Global Depository Receipts facilitate trade of shares,
and are commonly used to invest in companies from
developing or emerging markets.
• Prices of GLOBAL DEPOSITARY RECEIPT are often close
to values of related shares, but they are traded and
settled independently of the underlying share.
• Offered for sale globally through the various bank
branches
• Shares trade as domestic shares
 GDR Market
• GDRs can be created or cancelled depending
on demand and supply.
• Factors governing GDR prices are:
i. company track record
ii. analysts recommendations
iii. relative valuations
iv. market conditions international status of
the company
GDR – Advantages and Disadvantages

Advantages Disadvantages
• It allows investors to invest in • They have foreign exchange risk
foreign companies without i.e. currency of issuer is different
worrying about foreign trading from the currency of GDR
practices, law
• Easier in trading and payment of
dividend is in the GDR currency
• GDR are liquid because they are
based on demand and supply
which is regulated by creating or
cancelling shares
• It provides the company with
visibility, more larger and diverse
shareholder base and the ability
to raise more capital
internationally
GDR Trend (Source:capitaline.com)
 FCCB
• It is a type of convertible bond issued in a currency
different than the issuer's domestic currency.
• It is a quasi-debt instrument which are attractive to
both investors and issuers. The investors receive the
safety of guaranteed payments on the bond and
are also able to take advantage of any large
price appreciation in the company's stock.
• Due to the equity side of the bond, which adds value,
the coupon payments on the bond are lower for the
company, thereby reducing its debt-financing costs.
 ISSUE OF FCCBS
• An Indian company or a body corporate,
created by an Act of Parliament may issue
FCCBs not exceeding US $ 500 million in any
one financial year to a person resident outside
India under the automatic route, without the
approval from Government or the Reserve
Bank.
• Where the amount of fund to be raised is to
be USD 20 million or less the minimum
maturity period should be not less than three
years.
• If the amount to be raised is more than USD
20 million and upto 500 million the minimum
maturity period should not be less than 5
years.
• FCCBs upto USD 20 million can also carry a call
and put option provided the option shall not
be exercised until minimum maturity period of
3 years has expired.
• In terms of paragraph (x) of Schedule II of the
notification the issue of FCCB is required to be
reported to the Reserve Bank through the
designated branch of an authorised dealer.
• Authorised dealers may forward the same to the
concerned Regional Office of the Reserve Bank
for obtaining a loan registration number.
• While forwarding the offer documents to Reserve
Bank the authorised dealers shall ensure that the
FCCBs are issued strictly in accordance with the
notification.
 WHY FCCBS ARE POPULAR?
• Being hybrid instruments, the coupon rates on
FCCB are particularly lower than pure debt or
zero, thereby reducing the debt financing
cost.
• FCCB are book value accretive on conversion.
• Saves the risk of immediate equity dilution as
in the case of public shares.
Lucrative offer for investors:-

• Assured returns to investors on bond in the form

of fixed coupon rate payments.
• Ability to take advantage of price appreciation in
the stock by means of warrants attached to the
bonds, which are activated when price of a stock
reaches a certain point.
• Significant Yield to Maturity (YTM) is guaranteed
at maturity. Lower tax liability as compare to
pure debt instruments due to lower coupon
rates.
 REMEDIES TAKEN BY GOVERNMENT
• Promoters or issuers of foreign currency
convertible bonds (FCCBs) may be allowed to buy
back the bonds if they go in for prepayment.
• Also, promoters are likely to be allowed to utilize
the unused portion of the foreign currency-
denominated borrowings parked overseas. This
could also be utilized to meet the redemption
pressure after the bonds mature.
 CONTD…..
• It has now been decided to permit premature
buyback of FCCBs. For the buyback of FCCBs out
of rupee resources the RBI has fixed a minimum
discount of 25% on the book value. The amount
of the buyback is limited to US $50 mn of the
redemption value per company wherein this
window will be kept open till March 09.
• To Buyback FCCB out of Foreign Currency
minimum discount of 15% on the book value.
 FOR R-COM
• R-Com had issued zero-coupon FCCBs in February
2007, to raise USD 1 billion. The bonds are now
trading at a 35% discount to the issue price,
meaning, its bonds worth has now come down to
US$650 million
• RCom, as it currently has over Rs.100 billion in cash
reserves, which also includes about US$ 600 million
worth of investments in mutual funds overseas
• This move to buy back by Rcom is good, as it would
help the company reduce its liability and also bring
down its forex exposure.
 TATA MOTORS
• Tata Motors has cumulative outstanding FCCBs worth
Rs.44.87bn.
• Compared to current market price of Rs.152 the
FCCB’s is at a 85% discount compared to the
conversion price.
• Considering the large capex program planned by the
company and the downturn in automobile industry, shut
down of production facilities, likely increase in
borrowings to fund JLR, it could face difficulties in
terms of cash flow management in near term future and
is unlikely to opt for pre-payment option for FCCBs.
• Thus many companies Like Tata Motors which
are already under high debts are unlikely to
buyback due to limited cash flows
• Examples: SUBEX, AMTEK AUTOS,HOTEL
LEELA et al.
• Also $50million sum with limit of 25% discount
is only a small step for large FCCB issues.
Many companies will not be able to meet the
requirements.
 Contd…
• Two to three years back Indian markets were on high
growth and FCCBs became popular for raising funds
from overseas market. With the fall in the market,
many FCCBs has gone down, which means no money
and more problem in the market.
• Issuing companies will now have to search for
resources to repay the debt along with redemption
period whenever it matures. For this companies will
seek to fresh borrowings, with high interest rates,
which in turn would impact their profitability. Another
option, which companies have is to reset the conversion
clause, to bring it closer to reality.
(Source: capitaline.com)
 External Commercial Borrowing

• ECBs include bank loans, suppliers' and

buyers' credits, fixed and floating rate bonds
(without convertibility) and borrowings from
private sector windows of multilateral FI such
as International Finance Corporation.
 Contd..

• In India, ECBs are being permitted by the

Government for providing an additional
source of funds to Indian corporate and PSUs
for financing expansion of existing capacity
and as well as for fresh investment, to
augment the resources available domestically.
ACCESS ROUTES
 Access Routes
ECB can be accessed under two routes, viz., (i) Automatic Route
and (ii) Approval Route.
ECB for investment in real sector-industrial sector, infrastructure
sector-in India, and specific service sectors as indicated are
under Automatic Route, i.e. do not require the Reserve Bank /
Government of India approval. In case of doubt as regards
eligibility for the Automatic Route, Approval Route may be taken.
 Eligible Borrowers
Automatic
Route
• Corporate including hotel,
hospital, and software sectors
except financial intermediaries,
Housing Finance Companies
(HFCs) and NBFCs are eligible to
raise ECB.  participated in the textile or steel
• Individuals, Trusts and Non-Profit
making organizations are not
eligible to raise ECB.
Approval
Route
• Financial institutions dealing
exclusively with infrastructure or
export finance, on a case by case
basis
• Banks and FI which had
sector restructuring package
• ECB with minimum average
maturity of 5 years by NBFCs,
which are exclusively involved in
financing of the infrastructure
sector, can avail of ECBs
 Eligible Borrowers
Automatic
Route
• Units in Special Economic Zones
(SEZ) are allowed to raise ECB for
their own requirement.   finance infrastructure
• Non-Government Organizations
(NGOs) engaged in micro finance
activities are eligible to avail ECB.
Approval
Route
• SPVs or any other entity notified
by the Reserve Bank, set up to
companies / projects exclusively
• SEZ developers can avail of ECBs
for providing infrastructure
facilities within SEZ, as defined in
the extant ECB policy
• Corporate which have violated the
extant ECB policy and are under
investigation by Reserve Bank
 Re Financing Of Existing ECB
Automatic
Route
• The existing ECB may be
refinanced by raising a fresh ECB
subject to the conditions that the
fresh ECB is raised at a lower all-
in-cost and the outstanding
maturity of the original ECB is
maintained
Approval
Route
• Existing ECB may be refinanced by
raising a fresh ECB subject to the
condition that the fresh ECB is
raised at a lower all-in-cost and
the outstanding maturity of the
original ECB is maintained
ECB trends (Source:capitaline.com)
 Syndicate Loan
 Maturity Up to 7 years (Usually 5 years)
 Investors Entirely Banks - relationship oriented
 Pricing The lowest priced option for offshore
borrowing
 Liquidity Minimal
 Ratings Unnecessary
 Documentation Mostly standard but some
negotiation required
 Disclosure No formal requirements
 Timing 6-8 weeks
The Syndicated Loans – contd…

 Cheapest margin to LIBOR

 Speed and ease of Arrangement
Advantages
Advantages  Little pre-marketing required--except for
first time borrowers

 Limited to bank market

Disadvantages
Disadvantages  Limited appetite
 Maturity restrictions
Players in a Syndicated Loan Issue

 Lead Arranger (s)

- Normally also underwriter
 Then follow
- Co Lead Arranger, Lead Manager, Co Lead Managers etc
 Facility Agent
 Responsibility split among Lead Arrangers
- Documentation--normally done by Facility Agent
- Road shows
- Book running
- Signing ceremony
 Summary Timetable for a First Time Issuer

Launch & sign

Syndicate Prepare documentation/due diligence/marketing CLOSE
Loan
launch
Convertible Prepare documentation/due diligence/marketing CLOSE
Bond
launch, price & sign
Euro or Prepare documentation/due diligence/marketing
Finalize
CLOSE
documentation
Euro/Asian
launch, price & sign
Rule
Prepare and finalize documentation/due diligence/rating process/marketing CLOSE
144A
launch, price & sign
SEC
Registered Prepare and finalize documentation/due diligence/SEC filing/SEC review/rating process/marketing CLOSE
Yankee
launch, price & sign

Global Prepare and finalize documentation/due diligence/SEC filing/SEC review/rating process/marketing CLOSE

Weeks 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Thank You