Legal Aspects of International finance - Essay Example

Stock is the type of equity security with which most people are familiar. When investors (savers) buy stock, they become owners of a "share" of a company's assets and earnings. In other words, the companies borrowed directly by issuing securities to investors in the capital markets. By contrast, indirect finance involves a financial intermediary between the borrower and the saver. Emerging market bonds is a Security markets in countries such as Mexico and Malaysia that are still developing their industrial base.

Investments in emerging markets entail substantial risk with the potential for above-average returns. The direct or indirect benefits of international trade and finance come primarily from the enlargement of the market and the specialization and more efficient employment of productive resources, as well as technological advances. International transactions involve covenants agreed upon by different countries. The discussion of the paper is about the covenants involved. Debt covenants, also called banking covenants or financial covenants, are agreements between a company and its creditors that the company should operate within certain limits.

Debt covenants are agreed as a condition of borrowing. They may be changed if debt is restructured.(www.moneyterms.co.uk). One of the importances of debt covenants is that it can impose heavy obligation. Companies are careful in dealing with the covenant; breach of a debt covenant allows creditors to demand immediate repayment. A breach of covenants usually leads to a renegotiation of the terms of debt. In order to prevent companies from meeting the requirements by adjusting their accounting practices rather than by genuinely maintaining the required level of financial health, debt covenants not only specify the numbers that should be met, but also exactly how they should be calculated for the purposes of the debt covenant.

This means that if a company breaches, or is in danger of breaching its debt covenants, not only does this indicate that the company is not financially strong, but also that the problems are likely to become worse as lenders react. The following are reasons why covenants are important: (Noonan, 2005)1. Covenant protect bondholders against a diminution in value of their investment through:Credit deteriorationLoss of "equity cushion"Loss of control over assets Loss of seniority position 2. Covenants increase the chance of capital gains for bondholders because they force the company toDeleverage (or, more accurately, limit the company's ability to releverage)Reinvest earningsThe typical restricted payments covenant requires the company to retain 50% of net income in the business and allows 50% to be dividended out to to stockholders3.

As a result, covenants lead to credit improvement which increases chance that bonds will trade above parHigh Yield Debt Covenant Optional Redemption - Most issues of tax-exempt bonds have "call protection" wherein the bonds may not be called (i.e. redeemed) by the issuer for a specified period after the date of issue. A typical call protection period on a 30 year bond is the first 10 years after the issue date. After the initial period, many tax exempt bonds contain optional redemption provisions which permit the issuer to call the bonds prior