Corporate Financial Strategies for Global Competitiveness - Example

Name : xxxxxx Tutor : xxxxxxx Title : Eurobonds Institution : xxxxxxx @2016 Abstract This essay analyses and discusses some of the avenues available for organizations to raise capital internationally. It discusses how each avenue can be adopted as well as their dynamics. It also gives the advantages as well as the drawbacks of each capital raising method. The paper also looks at Eurobond as a means of raising money by both organizations as well as governments. History of Eurobonds, its evolution as well as its area of jurisdiction is explained herein. The scope of Eurobonds with regards to who offers, who qualifies as the recipient as well as how to process for such funding are discussed in detail. Introduction Most organizations including governments are characterized by dynamics in their economic growth and development. At times, external source of funding is therefore required to supplement some of their emerging unprecedented economic difficulties. However, sometimes, such organizations may need infrastructural expansion as well up scaling of their economic capacities. Such activities may not be affordable to the organization and thus is where international capital raising avenues comes into play (Fabozzi 2011). Raising capital internationally is a practice that begun in the early ages of late 18th century when definite and controllable financial institution had taken root with regards to development. However, in the early times, raising capital from such international levels from the traditional approach was not an easy task. The process was very costly and came in with very high risks with subsequent reduced probabilities of succeeding. However, recently, capital movement from overseas to local investors and organizations have become so easy than the domestic avenues of raising money. Most organizations finds it easy to raise money internationally especially for high end projects with long term outcomes easy with increased probability of succeeding. International capital raising avenues There are several avenues through which firms as well as any other organization can raise capital internationally. The need to raise capital internationally is basically attributed to the wider capacity of financial funding from the international or oversea financers as compared to local avenues of raising money such as bank loans. However, the mode to which a firm opts as their raise their money from the international financers depends on their financial structure. This option to which the firm wishes to obtain finances from depends on whether the firms’ assets are financed by means of short term loans or long term debt and equity. Therefore, international sources of funding can either be through transnational financing or transnational investment. Transnational financing refers to the where a firm seeks capital from the foreign sources and there are many avenues within the transnational financing docket as will be discussed below. Transnational investment on the other hand refers to firms investing their available capital in foreign markets as a way of raising capital from such markets (Norman 2007). Based on the above concepts, the available sources of funding for firms at the international levels include foreign stock exchanges, foreign bond markets, and foreign banks such as IMF as well as venture capital organizations. Apart from these avenues, there are other means that organizations can use to raise money internationally although this can result in lower cost as compared to the US markets. The low returns in such cases are attributed to the dynamics in the foreign currency as well as their exchange rates. Such methods include global equity and debt market. Equity financing This is one mode of raising capital from international markets by selling stock shares to the stock market. The stock market in this case refers to an institution with organized trading of securities by means of exchanges. An individual or another firm interested in such shares may buy partial ownership for the company or firm that sold their shares. As a return, the money used in buying the shares are used as capital by the subject firm to accomplish their economic goals to which the capital was intended for. There are institutions where all stock exchanges such as buying and selling of shares of stock at international levels are done. Of importance is the global equity market where such services are available and can be accessed easily. It provides a wider base to the process of buying and selling of the stock shares at any time. New York Stock Exchange is one of the largest stock exchange markets worldwide. Other large and well known stock markets include Tokyo Stock Exchange, National Association of Securities Dealers Automated Quotations stock exchange as well as London Stock Exchange. Advantages One major advantage associated with raising capital through the equity markets is associated with the fact that the capital do not have to be repaid within a limited time span. Such repayments are done through bank loans to the firm under consideration. Therefore, the firm is not subjected to any pressure in any way and is thus considered as one of the most immune way of raising capital internationally. Disadvantage This method of raising however come in with a shortcoming. Every time a firm sells their stocks to another firm, company or individual, it subsequently loses some level of control of the company to the shares buyer. Thus the decision making process would need consent and approval of the various shareholders in accordance to the shareholders policy stipulated by most financial management laws. Case Study Various multinational firms opt to raise capital from equity markets both from their domestic financial institution as well as trading internationally. French Luxury Beauty Products Company formally known as L’Occitane carried out its first IPO on Hong Kong stock exchange rather than its home based stock exchange market NYSE Euronext situated in Paris. This was a decision arrived by the management of the company with an aim of making the company more visible worldwide (Fabozzi 2011). Debt Financing Debt financing is another common way of raising capital internationally by firms as well as organizations. In this method, a firm raising money by borrowing the capital and signing an agreement requiring the firm to repay the borrowed amount together with an agreed rate of interest within a stipulated period of time. Therefore, firms can explore this mode of raising capital by taking bank loans or by selling their bonds. Advantage One major advantage of debt financing as compared to equity markets option is that the firm does not lose any ownership of their firm, organization or company at all. Therefore, the success of their expansion and development is entire for their full benefit. Disadvantage The finances have limitation with regards to the limited scope to which the firm has to repay the money as well as the high rates of interested implicated by some financing bodies sometimes especially during the times when foreign currency rates undergoes great fluctuations. Case Study In the year 2008, McDonald`s became the first foreign company to issue Yuan- dominated bonds. The bonds had an equivalence of $29 million with 3 percent notes that were due in September 2013. This is a practical example of international debt markets as a way of raising capital. Trade Credits There is a norm where firms can also raise funds in terms of loans from other firms. Such funding are called trade credits. Through trade credits, a firm may receive the services, goods or products they need from another firm but payments to the service providing are deferred for a specified period of time although the services or goods are at full dispensation by the recipient firm. The borrowing firm or organization is such a context is called a subsidiary while the financing firm is regarded to as the parent. Thus for such an arrangement, the parent as well as the subsidiary eliminate the payment transaction costs by delegating the responsibility to another entity such as a bank that may charge transaction fees. EUROBONDS Introduction Eurobonds refers to bonds that are normally sold outside the domestic markets of the markets of the currency in which they are dominated. Normally, they are underwritten by an international syndicate of banks and are considered as tax free. The characteristics of Eurobonds especially on the ownership and tax liabilities attracted a lot of investors to such bonds. Due to the feature of Eurobond as an external currency is where the name of such bonds regarded to as external bonds originated. Typically a bond is where a capital required by a lender is provided by various issuers and the amount of capital required is normally larger than what the domestic financial options can raise. The issuer must therefore repay the lender an interest as a stipend for using his/her capital. This comes in as interest payments made at an agreed rate and duration. The interest rate in such a case is referred to as a coupon and the amount borrowed is referred to as the face value. Origin and development of Eurobonds International bond markets developed way back in 19th century and began when the governments launched the first bond markets in London. However, the advancements in bond markets occurred recently and was well established by the year 1960 majorly as a dollar market (Norman 2007). The development of Eurobond markets was contributed by rapid growth in the London Eurodollar deposit market. Later, the Eurodollar depositors developed into the initial and the first ever foreign bond institution referred to as Yankee bonds and was the first US dollar bond whose issuance was based in New York and were issued to Non-US borrowers. However, this attracted a lot of investor and borrowers over run the US current account. It was then that in 1963, an interest equalization tax policy was developed and this gave the decisive impetus to the Eurobond development market. The Eurobond market therefore experienced a rapid expansion in the early 1960 hitting a $3 billion mark in the year 1970. The currency market for the bonds also experienced a rapid expansion. However, in the early and mid-1970s, some of the factors that led to development and rapid expansions of Eurobonds ceased to exist. The tax equalization for instance was abolished in 1974 however, this did not have a big effect on the US current account as well as the market base. Eurobond Market 1980 – 1990 The past decade 1980 -1990 saw the most rapid evolution of Eurobond market with regards to growth of issuance, currency diversification, borrowers as well as innovations among others. Total Issuance Total issuance saw a rapid rise from $26 billion in 1980 to $185 billion in 1986.There was however a fluctuation between 1987 and 1989 with regards with issuance as depicted in chart I below. Figure 1: Currency composition of Eurobond issued 1980 -1990 (Norman 2007) Currency diversification There has been a widening trend in the range of currencies in which Eurobonds are issued rising from 11 currencies in 1980 to a total of 21 currencies by the year 1990. The increased number of currencies has helped in diversifying investors’ portfolios with limited complications of investing in domestic markets (Norman 2007). Instruments Initially, straight fixed rate Eurobonds have dominated the Eurobond market as a dominant instrument. However, its importance have been on the diminishing trend by close to 72% of Eurobond issuance by 1980 to 61% by 1990. The decline reflects on the development in the Eurobond markets. Figure 2: Eurobond issues by instrument type (Norman 2007) Borrowers The Eurobond have been characterized by issuers being highly rated borrowers especially from the OECD countries. Between the year 1980 and 1990, issues by non-OECD countries were approximately 3.7% of the total Eurobond issuance. The table below summarizes the issuance of Eurobonds by the US private sector. Figure 3: Gross Flows in Eurobond market: Borrowing by nationality (Norman 2007) Who issues Eurobonds? Private organizations, fir and companies as well as international syndicates including governments and are in need of international capital can issue bonds. Such Eurobonds are offered at fixed and predetermined interest rates as well as clear fixed payment structure. For example is a U.S based company such as Coca-Cola want to establish its new markets in a place like India by constructing a large manufacturing plant, they would need a lot of capital in the India’s Local Currency i.e. the Indian Rupee. The fact that they are new in the vicinity may limit their access to India’s local credit markets. They may therefore incur a lot of expenses borrowing money locally. They may therefore raise such capital easily by issuing Eurobond by issuing a rupee-dominated Eurobond in the U.S investors. Therefore, U.S based companies having rupees in their accounts would purchase these bond and subsequently loan the capital amount in INR to the company. The mother company based in U.S collects these principal amount and floats a subsidiary company locally in India (Norman 2007). Benefits of Eurobond a) The bond markets gives issuers freedom in bond issuance to the country of their choice as well as freedom of currency in floating the Eurobond. b) Since the currency varies depending on the country, an investor may choose to invest with regards to Eurobond in the country with the most favorable rates. c) Use of Eurobonds gives a high level of immunity to the company with regards to economic and financial risks i.e. forex risks. d) Eurobonds also gives a great exposure to an investor for foreign investment as a result of local availability of foreign currency bonds. Conclusion Capital raising avenues are plenty both local as well as international avenues. The choice of the method through which the capital will be raised largely depends on the analysis of all the available avenues as well as their benefits and shortcomings. Foreign capital funding are known to cover scopes that local funding cannot cover with regards to amount and policies implicated to the borrower. Eurobonds however have proved to be the most secure capital raising mode especially for large organizations including governments. References NORMAN, P. (2007). Plumbers and visionaries: securities settlement and Europe's financial market. Chichester, England, John Wiley & Sons. RANDÖY, T., OXELHEIM, L., & STONEHILL, A. (2001). Corporate financial strategies for global competitiveness. European Management Journal. 19. FABOZZI, F. J. (2011). Handbook of finance. Volume 1, Volume 1. Hoboken, N.J., John Wiley & Sons. http://www.credoreference.com/book/wileyhffmi. Read More