Global Debt

and
Equity Markets
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Raising Funds for Business

Capital Market

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CAPITAL
•Can be Debt or Equity Capital
•Can be issued by Gov’t or Corporations
•Capital Investment, money invested in a
business to purchase fixed assets and
not for business’s day-to-day operating
expenses.

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MARKET
• Organizes buying and selling for convenience
• Securities
• Issuers (aka Originate)
• Entities that are issuers are the ones that
Originate the instruments called securities.
• Buyers of such securities are called
subscribers (Equities), or Bond Holders
(fixed income space)

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CAPITAL MARKET

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Who Are the Main Players
in Capital Markets?
The Main Players in the Generic Capital Market

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 Centralized Exchanges, OTC’s, and
ECN’s

Centralized exchanges-
buyers and sellers meet in a
Exchange
central, physical location.
•Organized market place or facility
•Over-the-counter markets
that brings together buyers and
(OTS’s)-decentralized
sellers and executes trade of
markets where dealers
securities and/or commodities
stand ready to buy and sell
•Philippine Stock Exchange (PSE)
securities electronically.
-Equity
•Electronic communication
•Philippine Dealing & Exchange
networks (ECN’s)-electronic
Corp. (PDeX) -Debt
system bringing buyers and
sellers together without the
use of a broker or dealer.
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Why Do
Capital Markets Exist?
• Capital markets bring together investors
and borrowers
• investors - corporations with surplus cash,
individuals, and non-bank financial institutions
• borrowers - individuals, companies, and
governments
• markets makers - the financial service
companies that connect investors and
borrowers, either directly (investment banks) or
indirectly (commercial banks)
• capital market loans can be equity or debt

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Debt Capital Markets

12-9
DEBT SECURITIES

12-10
Philippine Debt Capital Market

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EQUITY MARKET

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Equity Securities

 AKA shares of stock or common stock

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Philippine Equity Capital Market

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DEBT VS EQUITY

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What Makes the Global
Capital Market Attractive?
 Today’s capital markets are highly interconnected
and facilitate the free flow of money around the
world
 Borrowers benefit from the additional supply of
funds global capital markets provide
 lowers the cost of capital
 the price of borrowing money or the
rate of return that borrowers pay
investors

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What Makes the Global
Capital Market Attractive?
• Investors benefit from the wider
range of investment opportunities
• diversify portfolios and lower risk
• But, volatile exchange rates can
make what would otherwise be
profitable investments, unprofitable

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How Have Global Capital Markets
Changed Since 1990?
 Global capital markets have grown rapidly
 the stock of cross-border bank loans was just
$3,600 billion in 1990, $7,859 billion in 2000,
$33,913 billion in 2012
 the international bond market has grown from
$3,515 billion in 1997, $5,908 billion in 2000,
$21,979 billion in 2012

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Why Is the Global Capital Market
Growing?
 Two factors are responsible for the growth
of capital markets
1. Advances in information technology
 the growth of international
communications technology and
advances in data processing capabilities
 24-hour-a-day trading
 so, shocks that occur in one financial
market spread around the globe very
quickly

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Why Is the Global Capital Market
Growing?
2. Deregulation by governments
• has facilitated growth in international
capital markets
• governments have traditionally limited
foreign investment in domestic
companies, and the amount of foreign
investment citizens could make
• since the 1980s, these restrictions
have been falling

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Why Is the Global Capital Market
Growing?
• Deregulation began in the U.S.,
then moved to
Great Britain, Japan, and France
• Many countries have dismantled
capital controls making it easier
for both inward and outward
investment to occur

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What Is a Eurocurrency?
 A Eurocurrency is any currency banked outside its
country of origin
 About two-thirds of all Eurocurrencies are
Eurodollars
 dollars banked outside the U.S.
 Other important Eurocurrencies are the euro-
yen, the euro-pound, and the euro-euro
 The Eurocurrency market is an important source
of low-cost funds for international companies

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Why Has the Eurocurrency
Market Grown?
• The eurocurrency market began in the
1950s when the Eastern bloc countries
feared that the United States might seize
their dollars
• so, they deposited them in Europe
• additional dollar deposits came from Western
European central banks and companies that
exported to the U.S.
• could earn a higher rate of interest in London

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 Why Has the Eurocurrency
Market Grown?
 In 1957, the market surged again after changes in
British laws
 under the new laws, British banks had to attract dollar
deposits and loan dollars rather pounds to finance non-
British trade
 London became the leading center of the
eurocurrency market
 continues to hold this position today

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Why Has the Eurocurrency
Market Grown?
 In the 1960s, the market grew once again
 Changes in U.S. regulations discouraged
U.S. banks from lending to non-U.S.
residents
 would-be borrowers of dollars outside the U.S.
turned to the Euromarket as a source of
dollars

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Why Has the Eurocurrency
Market Grown?
 The next big increase came after the 1973-74 and
1979-80 oil price increases
 Arab members of OPEC accumulated huge
amounts of dollars
 avoided potential confiscation of their dollars by the
U.S. by depositing them in banks in London

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What Makes the Eurocurrency Market
Attractive?
 The Eurocurrency market is attractive
because it is not regulated by the
government
 banks can offer higher interest rates on
Eurocurrency deposits than on deposits made
in the home currency
 banks can charge lower interest rates to
Eurocurrency borrowers than to those who
borrow the home currency

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What Makes the Eurocurrency Market
Attractive?
• The spread between the Eurocurrency
deposit and lending rates is less than the
spread between the domestic deposit and
lending rates
• Gives Eurocurrency banks a competitive edge
over domestic banks

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What Makes the Eurocurrency Market
Unattractive?
• The Eurocurrency market has two significant
drawbacks:
1. Because the Eurocurrency market is
unregulated, there is a higher risk that bank
failure could cause depositors to lose funds
• can avoid this risk by accepting a lower return on a
home-country deposit
2. Companies borrowing Eurocurrencies can be
exposed to foreign exchange risk
• can minimize this risk through forward market hedges

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What Is the
Global Bond Market?
• Bonds are an important means of
financing for many companies
• the most common bond is a fixed
rate which gives investors fixed cash
payoffs
• The global bond market grew rapidly
during the 1980s and 1990s and
continues to do in the new century

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What Is the
Global Bond Market?
• There are two types of international bonds
1. Foreign bonds are sold outside the borrower’s
country and are denominated in the currency of
the country in which they are issued
• used by companies when they think it will reduce the
cost of capital
2. Eurobonds are underwritten by a syndicate of
banks and placed in countries other than the one
in whose currency the bond is denominated

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 What Makes the Eurobond
Market Attractive?
• The Eurobond market is attractive because
1. It lacks regulatory interference
• since companies do not have to adhere to strict
regulations, the cost of issuing bonds is lower
2. It has less stringent disclosure requirements than
domestic bond markets
• it can be cheaper and less time consuming to offer
Eurobonds than dollar-denominated bonds
3. It is more favorable from a tax perspective
• Eurobonds can be sold directly to foreign investors

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What Is the
Global Equity Market?
• The global equity market allows firms to
1. Attract capital from international investors
• many investors buy foreign equities to
diversify their portfolios
2. List their stock on multiple exchanges
• this type of trend may result in an
internationalization of corporate
ownership

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What Is the
Global Equity Market?
3. Raise funds by issuing debt or equity around the
world
• by issuing stock in other countries, firms open
the door to raising capital in the foreign
market
• gives the firm the option of compensating
local managers and employees with stock
• provides for local ownership
• increases visibility with local stakeholders

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How Do Exchange Rates
Affect the Cost of Capital?
• Adverse exchange rates can increase the cost of
foreign currency loans
• While it may initially seem attractive to borrow
foreign currencies, when exchange rate risk is
factored in, that can change
• firms can hedge their risk by entering into forward
contracts
• but this will also raise costs
• Firms must weigh the benefits of a lower interest
rate against the risk of an increase in the real cost of
capital

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What Do Global Capital Markets
Mean for Managers?
• Growth in global capital markets has created
opportunities for firms to borrow or invest
internationally
• firms can often borrow at a lower cost
than in the domestic capital market
• firms must balance the foreign exchange
risk associated with borrowing in foreign
currencies against the costs savings

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What Do Global Capital Markets
Mean for Managers?
• Growth in capital markets offers
opportunities for firms, institutions, and
individuals to diversify their investments
and reduce risk
• again though, investors must consider
foreign exchange rate risk
• Capital markets are likely to continue to
integrate providing more opportunities for
business
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