Global Capital Markets

1. Executive Summary

This report will evaluate the advantages and disadvantages of raising long term debt and equity capital via the global capital markets as opposed to the more traditional methods employed by the company of raising funds through the domestic markets.

2. Global Capital Revenue v Domestic

Raising capital in the global market place has a number of advantages over raising capital solely in the domestic market place. The first advantage is that by going global it will open the company up a larger market and will provide far more opportunities to raise capital as opposed to only raising capital in the domestic capital market which will severely restrict the number of potential investors. Also by raising capital globally it will lessen the risks involved and associated with raising capital by diversifying the businesses portfolio of investment. It will allow the company to share the risk through several markets as opposed to relying solely on one market. Finally there are also tax benefits to be gained by opening up the portfolio to the global market place. As the capital will be raised in foreign countries the regulations governing it may be different thus the possibility of financial benefits such as tax breaks. The specific advantages and disadvantages of raising capital globally will be discussed in more depth in this report. The following sections will look at the two main ways of raising international finance; international bonds and international equity.

3. International Bond Markets

The term �International Bond Market’ refers to two different types of bond; the foreign bond and the Eurobond. The following sections will look at these two types of bonds and evaluate the advantages and disadvantages.

3.1 Eurobond

A Eurobond is issued in the domestic currency of the issuer but sold outside of the issuer’s domestic market. The bond is under written by a syndicate of internationally diverse investment banks and is placed on to the bond market in at least two countries often being realised simultaneously. Examples of Eurobond would be:

Euro вЂ" Euro bonds: Any company within the European zone, using the Euro currency to issue the bond

Euro вЂ" Dollar bonds: An American company issuing a bond using the dollar as the currency of issue

Euro вЂ" Sterling bonds: An English company issuing a bond using sterling as the currency of issue

3.1.1 Advantages of the Eurobond

There is a large market for Eurobonds which gives an immediate advantage to the investor in that there is a vast choice when looking to raise capital in this area. It also means that the market can absorb large and frequent issues of bonds due to the existing size of the market. This market size has the advantage of being incredibly larger and more diverse than the current domestic market.

Eurobonds have become a very popular source of raising finances partially because they circumvent some of the restrictive registration requirements. The less restrictive nature allows greater freedom and flexibility than the domestic bond market as there is no requirement for formal disclosure. Bonds are issued in bearer form which will allow them to be held outside of the country. This has the advantage of being able to avoid any domestic taxation on them. The second advantage of having the bonds in bearer form is that there is a large and readily available secondary market dealing in the bonds. Another advantage gained by the greater flexibility of the eurobond is that it allows a lower rate of interest and a lower issue rates and charges due to it not be regulated by a single body. This therefore reduces the costs of raising finances in this way.

Eurobonds traditionally have a long maturity, on average 15 вЂ" 20 years but could be up to 40 years +. This gives assurance to the investor of the funds at a known rate for a long period of time. Bonds can also be issued in different ways or with different options attached. They can be issued in convertible form which means that at an agreed rate the bond can be converted into shares in the company at some point in the future. If this occurs the investor does not have the bond repaid but instead becomes a share holder in the company. An alternative to convertible form is an equity warrant. This is similar to the convertible form in that the investor can buy shares in the company at some point in the future at an agrees rate but still holds on to the bond until the date of maturity. This has the advantage that the issuing company can raise additional capital from the same source.

The Eurobond has a financially sound and institutional framework for the issuing, distribution and underwriting of the bond. For example if the company was looking to raise Ð'Ј10 million in capital the underwriters will guarantee to make up any shortfall of un-raised capital. This gives the security of guaranteeing the full amount of capital will be raised.

Finally the main advantage is that the issue of bonds will be in the domestic currency and therefore will negate any transaction risk.

3.1.2 Disadvantages of the Eurobond

As with any international raised capital there are risks involved. The company will need a big enough profile abroad in order to attract potential investors. Therefore the higher the company profile the more attractive prospect investing will be.

3.2 Foreign Bond

Foreign bonds are issued outside of their domestic market in the currency of the market that it has been issued in to. The bonds are underwritten by investment banks from the country of issue are will be governed by the financial regulations of the issuing country. Foreign bonds are often known by different �nicknames’ depending on where they are issued. For example:

Yankee Bonds: Foreign bonds that are issued in the USA

Bulldog bonds: Foreign bonds that are issued in the UK

Samurai Bonds: Foreign bonds that are issued in Japan

3.2.1 Advantages of the Foreign Bond

The main advantage of foreign bonds is if the company has a subsidiary in the foreign