National capital markets & international financing


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Summary of Alan C. Shapiro's Multinational Financial Management Chapter 13

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National capital markets & international financing

  2. 2. Someone is sitting in the shade today because someone planted a tree a long time ago. Warren Buffett
  3. 3. Reference Multinational Finance Management 8th Edition, Shapiro, Alan C., 2006. + Additional material from Investopedia & Wikipedia.
  4. 4. 1 Corporate Sources & Uses of Funds 2 National Capital Markets 3 Development Banks 4 Project Finance Financial Markets vs Financial Intermediaries; Globalization of Financial Markets As International Financial Centers World Bank Group; Regional & National Development Financing large-scale capital investment
  5. 5. Learning Objectives To describes trends and differences in corporate financing To define securitization and explain the forces that underlie it To explain why bank lending is on the decline worldwide T o explain what is meant by the globalization of financial markets To identify the functions and consequences of financial markets To describe the links between national and international capital markets To explain why firms may choose to raise capital overseas To descibes the types and roles of development banks
  6. 6. Internally Generated Cash Source of Funds Short-term External Fund Long-term External Fund
  7. 7. External finance come from investor / lender. Debt is the preferred alternatives – accounts for the overwhelming share of external funds. While, New stock issues play a relatively small and declining role in financing investment.
  8. 8. Whether debt/ equity, the issuer will turn to investment banker to assist in designing and marketing the issue. And compensated by the spread between the price at which they buy the security and the price at which they can resell it to the public.
  9. 9. Financial Intermediaries VS Financial Markets
  10. 10. Financial Market Any market place where buyers and sellers participate in the trade of assets such as equities, bonds, currencies, & derivatives. Typically defined by having transparent pricing, basic regulations on trading, costs and fees and market forces determining the prices of securities that trade. Financial Intermediary An entity that acts as the middleman between two parties in a financial transaction. Typical intermediary: commercial bank. Also includes investment banks, insurance companies, broker-dealers, mutual funds and pension funds. Investopedia
  11. 11. Securitization is the process through which an issuer creates a financial instrument by combining other financial asset and then marketing different tiers of the repackaged instruments to investors. Investopedia
  12. 12. Print screen from
  13. 13. Trends in external financing: Bank Borrowing German, French, & Japanese industry Corporate Borrowing U.S. & British industry
  14. 14. Recent technological & telecommunications improvement have greatly reduced the cost of obtaining and processing information about the conditions that affect the creditworthiness of potential borrowers. “
  15. 15. Investors are now more likely to find it costeffective to lend directly to companies rather than indirectly through financial intermediaries, such as commercial banks. “
  16. 16. So…? Financial Market…win?
  18. 18. Different financial system in terms of Corporate Governance Market-oriented financial system in U.S. and U.K. (refer to Anglo-Saxon model). Bank-centered finance financial system in Germany, France, & Japan (CEJ type financial system).
  19. 19. Keiretsu is a large industrial grouping with a major bank at the center. Keiretsu ties a complex web of tradition, cross-shareholding, trading relationship, management, and information swapping.
  20. 20. The one-set policy Wikipedia
  21. 21. BANK
  22. 22. The cost of accessing capital market directly = Japanese companies turn to corporate bond = Shareholder-oriented management approach
  23. 23. The world has become one vast, interconnected market. Markets for government securities & certain stocks, foreign exchange trading, interbank borrowing & lending, operates continously around the clock and around the world in enormous size. “
  24. 24. Freer Markets Widely available information Foundation for Global growth
  25. 25. National Capital Market as International Financial Centers
  26. 26. Financial Functions  Mobilize saving  Allocate resources  Facilitate risk transfer & risk mgt.  Monitor managers  Exert corporate control  Supply liquidity Factors Promoting WellFunctioning Markets  Secure property right  Contract easily enforceable  Meaningful accounting information  Transparent financial statement  Accountability of borrowers & investors  Borrowers & Investors bear the consequences of their decisions Consequences  Greater capital accumulation  Better projects  More innovation  Managerial accountability  Preffed time pattern of consumption Result  Stronger economic growth  Greater consumer satisfaction
  27. 27. International Financial Markets Financial markets where foreigner can both borrow and lend money Entrepots  Channels through which foreign fund pass  Switzerland, Luxembourg, Singapore, Hongkong, Bahamas, Bahrain Important Int’l Financial Center     London Tokyo New York Germany & France Requirement for becoming In’t Financial Center  Political Stability  Minimal government intervention
  28. 28. Foreign Access to Domestic Markets
  29. 29. 1 2 3 The Foreign Bond Market Portion of the domestic bond market that represents issues floated by foreign companies or governments The Foreign Bank Market Portion of domestic bank loans suppllied to foreigners for use abroad The Foreign Equity Market Placing stocks in foreign market – to diversify the equity funding risk
  30. 30. Globalization of Financial Market has its Downside
  31. 31. Critics for Financial Market globalization:  The investors only seeks for the highest risk-adjusted return, they will swift to abandon countries whose economic fundamentals are questionable.  They will demand bigger premium for the risk of holding the country,  It will lead to the devaluations of the country’s currency.  The devaluation raises the cost of imports and boost its interest rate.
  32. 32. Financial markets are in the business of gathering and processing information from savers and borrowers around the worlds in order to perform their real function, which is to price capital and allocate to its most uses. Markets reflect the perceptions of risk and reward of its participants, and do not create the underlying reality that caused the bad perceptions of Financial Markets.
  33. 33. Development Bank World Bank Group, Regional & National Development Bank
  34. 34. Three types of Development bank: Regional Development Banks
  35. 35. Function of Development bank: • provide equity & debt financing to aid in the economic development of under developed areas. • Include extending intermediate- to long-term capital directly. • strengthening local capital markets. • supplying management consulting services.
  36. 36. World Bank Group: multinational finance institution that was established at the end of WWII to help provide long-term capital for the reconstruction and development of member countries.
  37. 37. IBRD  IBRD makes loans for projects of high economic priority.  A government guarantee is a necessity for World Bank funding.  Bank’s main emphasized on large infrastructure projetcs (roads, dams, power plant, education, & agriculture).  Loans are tied up to debtor nations economic policies: freer trader, more open investment, lower budget deficits, & more vigorous private sector.
  38. 38. IFC  Finance various projects in the private sector through loans and equity participations and to serve as a catalyst for flows of additional private capital investment to developing countries.  Doesn’t require government guarantees.  Emphasized on manufacturing firm that have reasonable chance of earning the investor’s rate of return and will provide economic benefits of the nation.  Concentrate its lending & equity in investment-grade-conglomerate.  Help companies to conduct business in a more open and investor-friendly manner.
  39. 39. IDA  Founded in 1960, to makes loans (soft/ highly concessionary) for project in LDCs.  Require a government guarantee.
  40. 40. Regional Development Bank Provide funds for financing of manufacturing, mining, agriculture, & infrastructure projects considered important to development.
  41. 41. Regional Development Banks Leading Regional Development banks : African Development Bank (ADB) Asian Development Bank (ADB) European Investement Bank (EIB) Inter-American Development Bank (IADB) Atlantic Development Group for Latin America (ADELA) Arab Fund for Economic & Social Development (AFESD)
  42. 42. National Development Bank Have the same characteristics of success: they must attract capable, investment-oriented management; and they must have large enough supply of economically viable projects.
  43. 43. Project Finance
  44. 44. Project Financing The raising of funds to finance a project in which the providers of the funds look primarily to the cash flow from the project as the source of funds to service their loans and provide the return of and a return on their equity investment in a project.
  45. 45. Key Attributes Of project financing : Focus on the economically separable nature of investment projects suitable for project financing. Nonrecourse lenders have resort only to the project assets and cash flows (no sponsor). The underlying assets in project are large, illiquid industrial assets. Project have a finite life, at the end of which all debt and equity investors are repaid.
  46. 46. Competition among companies for capital force them to be more financial transparent, and improve corporate governance with greater focus on the rights of shareholder rather than managers.
  47. 47. Presented By: Galih H. Baskoro