2.6Raising Debt Capital in the Euromarkets

As Chapter 1 suggested, there are two general ways that a firm can raise money inter-

nationally: in the Euromarkets or in the domestic markets of other countries. Firms

using the Euromarkets can either sell bonds or take out loans. Firms also can sell debt

directly to foreign investors or borrow directly from a foreign bank in a variety of

currencies.

18

The Economist, June 18, 1994.

¹⁹See

Tufano (1992).

Grinblatt132Titman: Financial	I. Financial Markets and	2. Debt Financing	© The McGraw132Hill
Markets and Corporate	Financial Instruments		Companies, 2002
Strategy, Second Edition

54Part IFinancial Markets and Financial Instruments

Features of Eurobonds

AEurobondtypically has the following features:

•	It is sold outside the country in whose currency it is denominated.
•	It is a bearerbond, which means it is unregistered and payable to the personwho carries it; losing a Eurobond is like losing a wallet filled with currency.20
•	It is offered to investors in many different countries, usually by an international syndicate of investment banks.
••	It is generally sold only by large and well-known multinational firms. Its coupons are typically paid annually.

Because the Eurobond market is not located in any one country, it is mostly self-

regulated by the Association of International Bond Dealers. Atypical issuer, such as a

U.S. multinational company, does not have to meet SEC requirements to sell a

Eurobond security. This allows deals to be completed in just a few days.

RJR made heavy use of the Eurobond market after it bought Nabisco in 1985. As

part of the financing, the company went to the Euromarkets with eight separate issues

between August 1985 and May 1986, raising more than $850 million from both straight-

and dual-currency bonds in five different countries—the dollar, yen, ECU (the currency

of the European Union), Swiss franc, and deutsche mark (DM)—using four different

lead underwriters.

Size and Growth of the Eurobond Market and the Forces behind the Growth

The growth in the Eurobond market has been spectacular. This growth has been driven

in part by the growth in the currency swap market. Acurrency swapis simply an

agreement between parties to periodically exchange the future cash flows of bonds with

payoffs in two different currencies.²¹

For example, in 1991 Daimler-Benz (now Daim-

lerChrysler) issued more than DM 3 billion in Eurobonds denominated in Canadian

dollars, Swiss francs, ECUs (now, replaced by Euros), Italian lire, British pounds, and

U.S. dollars. These were swapped into deutsche marks, U.S. dollars, lire, Spanish pese-

tas, and French francs.

Swaps enable firms to issue bonds in whatever currency they choose and to swap

the proceeds into whatever currency they need. They allow multinational firms like

DaimlerChrysler to take full advantage of global capital markets to obtain the lowest

borrowing rate, and then to hedge the currency risk of their global operations and their

financing with a series of swap agreements.

Eurocurrency Loans

Firms can also raise funds in the Euromarkets through a Eurocurrency loan. A

Eurocurrency is a major currency on deposit in a bank outside of the country of ori-

gin for the currency. Thus, when AT&Tdeposits dollars into the London branches of

²⁰While

having a bearer bond means that you must physically clip a coupon on the bond to obtain an

interest payment, this is viewed by some governments as inconveniencing tax collectors more than

bondholders.

²¹See

Chapter 7 for additional discussion of currency swaps.

Grinblatt134Titman: Financial	I. Financial Markets and	2. Debt Financing	© The McGraw134Hill
Markets and Corporate	Financial Instruments		Companies, 2002
Strategy, Second Edition

Chapter 2

Debt Financing

55

Barclays, their deposits become Eurodollardeposits. Similarly, when Toyota

deposits yen in the London branches of Deutsche Bank or Fuji Bank, the yen become

Euroyen deposits. The banks loan the funds out short-term as LIBOR loans to other

major banks. Alternatively, banks may lend the funds as long-term Eurocurrency

loans to a firm.

Features of Eurocurrency	Loans.	The following features characterize long-term
Eurocurrency loans:

•	They are issued on a floating-rate basis, usually at a fixed spread above LIBOR.
•	The margin varies between about 50 and 300 basis points, depending on thecredit risk of the borrowing firm or bank, with the benchmark LIBOR rate generally reset every six months.
•	They have a maturity of 3 to 10 years.

•	They are issued by a syndicate of banks which charge fixed fees of 0.25–1 percentof loan value. The syndicate allows great flexibility in the timing of takedowns ofthe loan commitment.

The case below illustrates a Eurocurrency loan.

Comdisco’s Use of Eurocurrency Loans

Comdisco, a U.S.-based firm that leases computers, peripherals, and other high-tech equip-

ment to customers worldwide, has subsidiaries in more than 60 countries. Naturally, cus-

tomers prefer to transact in the local currency. To fund working capital needs in the early

1990s, Comdisco set up a credit facility with a syndicate of banks that included LaSalle

National in Chicago, Westpac in Australia, the Union Bank of Switzerland, and three Japan-

ese banks: Yasuda Trust, Toyo Trust, and Mitsui Taiyo Kobe. The credit function is cen-

tralized in Comdisco’s Chicago headquarters; all the local subsidiaries have to do to bor-

row is make one phone call to headquarters, thus avoiding the time-consuming process of

credit approval from a foreign bank. Centralization also means that the spread paid on all

loans is a small margin over LIBOR plus a flat fee to arrange the facility. The local units

enjoy the advantages of cheaper borrowing, low transaction costs, and the ability to borrow

in almost any currency from the branch offices of syndicate members.

Source: Creating World-Class Financial Management.

Why the Rates of Eurocurrency Loans Are Relatively Low.For a number of rea-

sons, lending rates in the Eurocurrency market are often cheaper than those in domes-

tic markets. First, banks have no reserve requirements for Eurodeposits. Second, bor-

rowers are large, well-known companies with good credit ratings, which diminishes the

degree of investigation required by the lender firm. Finally, the lack of regulation means

that banks can price loans more aggressively in the Eurocurrency market than they can

in the domestic market. For all of these reasons, the market has grown substantially

since the mid-1980s.