Question

Why would firms raise money overseas in international bond markets? How would they do it? What are the benefits? Thanks!

Answer 1

Firms raise money overseas in international bond markets because :

• to reach global markets that are inherently deeper, diverse and more liquid.
• the economic condition prevailing in the domestic market may not be suitable to raise debt locally like high interest rates, etc.
• international bond markets is an important place for tapping foreign savings.
• relative size of the domestic market influences the decision to raise funds in international bond markets, if the size of domestic market is relatively small, it increases the probability of the foreign issue.
• firms with foreign exchange income for example Euro, may issue bonds denominated in Euro to provide a hedge for Euro cash flows.
• decision can be also based on lower transaction cost and complete information available in the foreign market
• availability of hedging instruments and liquidity in derivatives markets also affects the domestic vs. international issuance decision.

How funds are raised :

To raise money overseas in international bond markets, usually bonds or other debt instruments are issued in the foreign country from where the money is to be raised for example, Eurobonds. The bonds or other debt instruments are denominated in the currency of that country. These insruments are regulated by the local rules and regulations of the foreign country. For example, if a US firm issues bonds in Japan, the local laws of Japan will applicable to the bond issue. Steps involved are:

Step 1 : appoint a lead manager to issue in foreign country.

Step 2 : lead manager will negotiate the terms of issue with issuing firm.

Step 3 : lead manager along with banks appointed will act as underwriters.

Step 4 : underwriters will take up a portion of the issue as agreed.

Step 5 : the bond will be issued

Benefits of international issue :

• large amounts of funds can be raised in the international market
• debts in international bond markets are raised usually for a very long period like 10 - 20 years, hence, funds can be enjoyed for longer
• usually, if funds are raised in foreign market, it is due to lower costs of issue and other related costs
• lower interest cost is another motivation for international issue