banking - NYU Stern

Transcript banking - NYU Stern

Tuesday: Bank and Bond Financing

Connexion loan Cap des Biches Don Pedro Hydro

Westpac Eurobonds

Global Banking and Lending

Cap des Biches: Choices for the BCEAO

 Foreign-exchange intervention  Money-market intervention (consider interaction with monetary policy)  Fiscal policy--the demand side  Tariffs and subsidies  Exchange controls and capital controls (and jawboning) Copyright ©2003 Ian H. Giddy

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Cap des Biches: Choices for GTI-Dakar

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Cap des Biches: Choices for GTI-Dakar

“We must decide whether it’s worth covering our dollar exposure, given the forward premium and relative interest rates.”  What is the probability of a devaluation?

 How much?

 What should GTI-Dakar do?

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Cap des Biches: Choices for GTI-Dakar

 Renegotiate the $30 million loan, replacing it with a loan denominated in Euros  Keep the USD loan in place, but enter into a 6-year currency swap to effectively convert GTI's payments into Euros.

 Hedge the dollar-Euro risk by buying dollars forward, with rolling 3-month forward contracts  Hedge against a possible devaluation of the CFA franc, by selling francs in the 3-month forward market.

 Leave the dollar loan unhedged, and pass the cost of any foreign exchange losses on to Senelac, the buyer of GTI's power  Do nothing now but watch the situation carefully and hedge if the risk becomes too great.

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Global Banking: Strategy & Techniques

Prof. Ian GIDDY Stern School of Business New York University

Products or Customers?

Sales

Customer-Driven Innovation

Capital Markets Corporate Finance

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Client-Arena-Product Matrix

Clients served Markets covered

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Products

 Credit products  Trading and positioning  Risk management products  Financial engineering and structured finance  Underwriting and distribution  Asset management  Retail and private client services  Transactions services Copyright ©2003 Ian H. Giddy

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Alternative Bank-Industry Linkages

The Equity Market System Banks The Bank Based System Banks / Investment Vehicles The Bank Industrial Crossholding System Investment Vehicles & Insurance Banks The State centered System Banks / Investment Vehicles Industrial Companies Copyright ©2003 Ian H. Giddy Individuals Industrial Companies Individuals Industrial Companies Individuals Industrial Companies Individuals State Institutions Investment Vehicles Investment Vehicles & Insurance Industrial Companies Investment Vehicles & Insurance Industrial Companies

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Product Profitability Cycle

Excess returns

Time

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Client-Arena-Product Matrix

Build versus buy?

Clients served Markets covered

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Client-Arena-Product Matrix

Deutsche Bank in USA

Clients served Markets covered

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Client-Arena-Product Matrix

Sell?

Clients served Markets covered

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Complementarity and Cross-Selling

Insurance Retail

Citigroup?

Wholesale

Asset Management

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Client-Arena-Product Choices for West Afrtican Banks?

Clients served ?

Markets covered

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International Bank Financing

Prof. Ian Giddy New York University

International Banking and Credit

 International Banking and the Eurocurrency Market  The Separability of Pricing from Commitment Periods  The Syndication Technique in International Lending  Transferability and Trading of Loans  Note Issuance Facilities  Euro-commercial Paper  Floating-rate Notes Copyright ©2003 Ian H. Giddy

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Interest-Rate Parity

$1 (1 + i E$ ) = ($1/ S t )(1 + i EBP ) F n t

where S t is the spot exchange rate (dollars per British Pound) and F n t is the forward rate.

Or, to a close approximation, (i E$ - i EBP ) = [(F n t - S t )/S t ] (365/n) 100

Interest-rate differential = forward premium or discount

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Asset-Liability Management

Assets Liabilities Loans



Floating rate



Fixed rate Deposits



Short term



Long term

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Asset-Liability Management

Assets Liabilities Loans



Floating rate



Fixed rate “Bought money”

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Asset-Liability Management

Assets Liabilities Loans



Floating rate



Fixed rate

Active money market trading

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Loan Pricing: Basis and Margin

Assets Loans



Prime rate Liabilities

Domestic deposits

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Loan Pricing: Basis and Margin

Assets Loans



Prime rate Loans



Libor-based Liabilities

Domestic deposits Wholesale deposits

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Transferability of Loans and Off Balance Sheet Banking

DANSKE DESIGN

Furniture Group DM95,000,000 Multicurrency Term Loan

Arranged by

Northern Bank Group

Lead Manager

Bank of Copenhagen The Industrial Bank of Japan, Ltd Kansallis-Osake-Pankki Scandinavian Bank Group Swiss Bank Corporation

Managers

Amsterdam-Rotterdam Bank N.V. BHF Bank Crédit Lyonnais

Funds provided by

Amsterdam-Rotterdam Bank N.V. Banco Central S.A. Banco Herrero Banque du Midi BHF Bank Crédit Lyonnais The Industrial Bank of Japan. Ltd The Irish Poets' Bank Kansallis-Osake-Pankki Scandinavian Bank Group Swiss Bank Corporation

Agent Bank

Northern Bank Group Au g us t 1 9 92

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The Syndication Technique in International Lending

   Syndication is the underwriting and distribution of large bank loans,

a distribution method adapted from the securities underwriting business

Risk reduction in syndicated loans: 1. Credit analysis 2. Monitoring and control 3. Taking a smaller amount of more, diversified assets 4. Relying on the monitoring role of the lead bank or banks .

Better information about 1. Aggregate amount of lending to any one borrower (especially a country) 2. Terms and conditions of other segments of the loan and of other lending to the same borrower.

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Trading and Transferring Loans

ASSIGNMENT PARTICIPATION FULL ASSIGNMENT

The sale of

all

of the originating lender’s or

assignor’s

rights and interest in a credit facility to a purchaser or

assignee.

PARTICIPATION

Participants have derivative rights, not direct rights against (or obligations to) the borrower.

ASSIGNMENT WITH NOVATION

  

LIMITED VOTING PARTICIPATION FULL VOTING PARTICIPATION FULL PASS-THROUGH PARTICIPATION

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Trading and Transferring Loans

ASSIGNMENT PARTICIPATION FULL ASSIGNMENT

The sale of

all

of the originating lender’s or

assignor’s

PARTICIPATION

Participants have derivative rights, not direct rights against (or obligations to) the borrower.

 to a purchaser or

assignee.

   The borrower must consent to release of obligation by the assignor The assignee has direct access and enforcement of rights against the borrower

LIMITED VOTING PARTICIPATION ASSIGNMENT



FULL VOTING PARTICIPATION WITH NOVATION



FULL PASS-THROUGH PARTICIPATION

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Trading and Transferring Loans

ASSIGNMENT PARTICIPATION FULL ASSIGNMENT

The sale of

all

of the originating lender’s or

In a participation:

PARTICIPATION

Participants have derivative rights, not direct rights against (or obligations to) the borrower.

to a purchaser or Participants have derivative rights, not direct rights against (or obligations to) the borrower  Counterparty risk exists for lead bank

LIMITED VOTING PARTICIPATION ASSIGNMENT



WITH NOVATION



FULL VOTING PARTICIPATION FULL PASS-THROUGH PARTICIPATION

Global Banking and Lending

The Separability of Pricing from Commitment Periods

 The Eurocurrency market permits the separation of the

currency

denomination

from the

country of jurisdiction.

 A seemingly simple loan has inherent a large number of different features and aspects of risk, including  pricing (over short-term LIBOR)  commitment (medium term)  funding the loan  International bankers isolate these features in order to distribute and to hedge the inherent risks Copyright ©2003 Ian H. Giddy

Global Banking and Lending

The International Money Markets

Source: ft.com

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Pricing a Loan to BHP

What maturity and currency do they want to borrow?

What is the credit quality of this borrower?

Price the loan

USD A-

Get USD Libor as cost-of-funds proxy Set an appropriate spread over Libor

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Pricing a Loan to BHP

USD A-

Get USD Libor as cost-of-funds proxy Set an appropriate spread over Libor

www.marketprices.ft.com/markets/currencies/money

Price the loan

pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ratings.htm

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Funding the Australian Loan

Three ways to fund:

 Take domestic Aussie dollar deposit

3 MO

 Take EuroA$ deposit

3 MO A$ DEP A$ DEP

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Funding the Australian Loan

Three ways to fund:

 Take domestic Aussie dollar deposit

3 MO

 Take EuroA$ deposit  Fund with dollars, hedged into Aussies  Take E$ deposit  Do FX swap: sell USD spot, buy USD forward

3 MO

E$ FX DEP SWAP E$ FX DEP SWAP

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Raising the Money: Note Issuance Facilities

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A Revolver

The Bigfoot Group RUF Structure:  Arranger £115,000,000 equivalent Committed Revolving Facility  Underwriting banks   Tender panel Agent

Arranged by

Credit Suisse First Boston Limited

Underwriting Banks

ABN-AMRO N.V. Banque Indosuez Crédit Lyonnais Deutsche Bank Fuji International Finance Limited Banque Paribas Samuel Montague & Co. Limited County Bank Kredietbank Banque Bruxelles Lambert S.A. Citibank Crédit Suisse Sumitomo Finance International Westdeutsche Landesbank Girozentrale o Finance International Westdeutsche Landesbank

Tender Panel Members

ABN-AMRO N.V. Indosuez Crédit Lyonnais CIBC Limited Deutsche Bank Fuji International Finance Limited Banque Paribas LTCB International Limited J.P. Morgan County Bank Kredietbank Banque Bruxelles Lambert S.A. Citibank Crédit Suisse Commerzbank Merrill Lynch Capital Markets Sumitomo Finance International Salomon Brothers International Westdeutsche Landesbank Girozentrale Copyright ©2003 Ian H. Giddy

Tender Panel and Facility Agent

Credit Suisse First Boston Limited

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Laura Ashley

Need lots of money fast?

Have trouble accessing CP market?

Confident of always being able to access the short-term market?

Arrange RUF or MOF: Underwritten Euronote program

Need funds?

Cannot sell paper at L+10bp?

Issue Euronotes or other paper

YES YES NO YES

Arrange syndicated credit Arrange Euronote program Don’t issue paper Borrow from banks

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Comparison of RUF to Put Option

-

+ Gain or loss relative to having no underwritten facility

"STRIKE PRICE"

Market spread relative to LIBOR at which the borrower can issue short term paper.

FEES

0 LIBOR FLAT CAP SPREAD

Global Banking and Lending

Euro-commercial Paper

 ECP is an unsecured promissory note, issued and placed outside the jurisdiction of the currency of denomination.

 A Eurocommercial paper facility  By definition, the facility provides only for the best-efforts auction of paper; the borrower has no underwritten assurance of availability of funds  Today, most committed facilities are used by those who want a medium term back-up line on which they do not intend to draw--often to back up a U.S. commercial paper facility.

 Uncommitted Euro-commercial paper or U.S. commercial paper facilities are used for actually raising funds.

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International Bank Lending

DOMESTIC LOANS

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International Bank Lending

DOMESTIC LOANS EUROMARKET LOANS

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International Bank Lending

DOMESTIC LOANS EUROMARKET LOANS SYNDICATED EUROCREDITS

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International Bank Lending

DOMESTIC LOANS EUROMARKET LOANS SYNDICATED EUROCREDITS NOTE ISSUANCE FACILITIES

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International Bank Lending

DOMESTIC LOANS EUROMARKET LOANS SYNDICATED EUROCREDITS NOTE ISSUANCE FACILITIES EUROCOMMERCIAL PAPER

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Case Study: Connexion

 Would you advise Connexion to use a syndicated loan to finance its prospective acquisition?  If so, how would it be structured and distributed?  How should the bank evaluate and price the risk?

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Connexion: Group Questions

1. From the perspective of Connexion, what are their main objectives for this financing?

2. What would be the most appropriate product to offer Connexion? 3&10. How was the financing structured? 4. What issues come to mind regarding pricing?

5. How are the banks protected against risks?

6. After the loan is done, what are the main benefits to the bank, Soc Gen?

7. What are the benefits to the other banks?

8. What could go wrong?

9. Soc Gen: how much profit?

Global Banking and Lending

Tuesday: Bank and Bond Financing

Connexion loan Cap des Biches Don Pedro Hydro

Westpac Eurobonds

Global Banking and Lending