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1)money transmission and cash management;

2)credit facilities - loans, overdrafts, standby lines of credit and other facilities;

3)syndicated loans (only available to large companies and multinational firms);

4)debt finance via bond issuance (only available to large companies and multina tional firms);

5)other debt finance including asset-backed financing;

6)domestic and international equity (the latter typically only available to large companies and multinational firms);

7)securities underwriting and fund management services;

8)risk management and information management services;

9)foreign exchange transactions and trade finance.

4.6.1.1Money transmission and cash management

An important area where firms conducting international activities differ from smaller domestic-oriented firms is in the provision of cash management and transaction services, as they have to deal with remittances and payments in both the domestic and foreign currency. Although many companies may not be large enough to have well-developed treasury activities they are likely to have more advanced cash management systems than their domestic counterparts. The cash management function in firms has developed mainly as a result of:

a)corporate recognition that excess cash balances result in a significant opportunity cost due to lost or foregone interest;

b)the firm's need to know its cash or working capital position on a real-time basis; and

c)the need for foreign currency flows of cash to be managed effectively in order to minimise possible exchange rate risk.

The extent to which such services are used obviously depends on the scale of the firm's activities and the extent of its international operations. The largest companies will have treasury functions that resemble small banks conducting this type of business, whereas mid-sized companies are likely to have a limited array of cash management activities.

4.6.1.2 Credit facilities - loans, overdrafts, standby lines of credit and other facilities

Firms of all sizes have a broad array of bank credit facilities available for use in financing their operations. These range from standard loan facilities that may be

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fixed or floating rate, secured or unsecured, and can have shortto long-term maturities. In many respects these types of loan facilities are not really any different from consumer loans apart from their size. Companies also, of course, have access to on-going overdraft facilities to meet short-term financing needs.

In addition to these standard products, larger companies will have access to Eurocurrency markets. The Eurocurrency market is essentially a high-volume, lowrisk borrowing and depositing market. The main segment of the market is the interbank market where a relatively small number of large commercial banks undertake deposit and lending activities. Other important participants include companies and governments who use the market to fund short-term deficits and invest short-term surpluses. Various other financial institutions, such as investment banks, also use the market to fund large-scale holdings of securities through pledging these in repurchase (repo) agreements. Unlike banks, which issue certificates of deposit (CD), large non-financial companies can fund their shortterm deficits by issuing commercial paper (CP) or by discounting trade receivables in the form of banker's acceptances. These are techniques used for raising short-term wholesale funds denominated in a currency other than the home currency. For instance, a UK multinational company (MNC) may issue $5 million of commercial paper to raise short-term finance or can simply borrow in the interbank market -the latter is a dollar Eurocurrency loan. (Similarly, the UK firm may have access to dollar funds and place, say, a $5 million deposit with a bank - this is known as a Eurocurrency deposit.) Access to the Eurocurrency markets is mainly the preserve of banks and large international companies. Box 4.3 provides a snapshot of recent non-bank activity in the Eurocurrency markets highlighting the short-term foreign currency financing of international enterprises.

In addition to standard loan products, banks will also provide their corporate clients with various commitments and guarantees (see Section 3.5.2).

Box 4.3 Short-term Eurocurrency lending to non-banks loan customers stagnate in the third quarter of 2003

Following a comparatively large increase in the third quarter, loans to non-bank borrowers stagnated in the fourth. Total claims on non-banks were up by $37 billion, less than two thirds of which actually took the form of new loans.

However, this rather modest aggregate growth masks some relatively large underlying movements. In particular, total claims in US dollars rose by $35 billion, despite a notable contraction in claims by banks in the United States, while eurodenominated claims declined for the first time since the introduction of the euro.

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Banks in the reporting area seemed to have halted their tentative advance in international lending to corporate and other non-bank private sector borrowers in the fourth quarter. A resumption of Japanese banks' investment in US Treasury and other debt securities vis-a-vis the United States accounted for a large part of the $35 billion overall increase in US dollar-denominated claims.

Moreover, the BIS consolidated data indicate that portfolio shifts towards the nonbank private sector, while apparent in several euro area countries in the third quarter, remained stable vis-a-vis this sector for most banking systems in the fourth. Although US banks did raise their exposure to this sector, $16 billion of their $26 billion in new international claims flowed to such borrowers in the United Kingdom, offshore centres (primarily the Cayman Islands) and Luxembourg, suggesting that increased credit ties with non-bank financials was responsible.

Overall, activity involving offshore and other major financial centres, either as lenders or borrowers, remained significant in the fourth quarter. Banks in offshore centres accounted for a rise in lending to non-bank borrowers in the United States, extending $40.5 billion in loans, which possibly reflected the funding of affiliated securities houses and hedge fund activity. At the same time, banks in the United States reduced loans to non-bank borrowers in offshore centres by $22 billion; excluding this move, loans to these borrowers in offshore centres rose by $3.6 billion, mainly as a result of credit from banks in the United Kingdom and the euro area. Claims on nonbank customers in other major financial centres also increased. Banks in the reporting area, primarily in the euro area and the United States, directed $19 billion in new loans to non-banks in the United Kingdom. Similarly, banks in the United Kingdom and the euro area channelled $12 billion to non-banks in Luxembourg.

Source: BIS (2004b) 74th Annual Report (1st April 2003 - 31 March 2004) Basle: BIS.

4.6.1.3 Syndicated loans

In a syndicated loan, two or more banks (members of the syndicate) agree jointly to make a loan to a borrower. Every syndicate member has a separate claim on the borrower, although there is only a single loan agreement contract. One or several lenders will typically act as an arranger or lead manager, instructed by the borrower to bring together the consortium of banks prepared to lend money at a given set of terms. Corporate borrowers usually have their relationship banks at the core of the syndicate and they may bring in other institutions according to the size, complexity and the pricing of the loan as well as the desire of the firm to extend the range of its banking relationships. Pricing of the loan is set at a margin above the interbank rate

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(usually LIBOR) and fees are also paid by the borrower to the syndicate for arranging the loan.

Syndicated loans may take the form of:

•term loans - where the loan amount is specified for a set time;

•revolving credit facilities - where part of the loan can be drawn down, repaid and then redrawn depending on the borrowers discretion;

•standby letters of credit - where the credit facility is arranged to enhance the credit risk of the borrower; and

•singleor multi-currency loans.

Box 4.4 briefly notes global telecom firm's involvement in the syndicated loan market. Typically, access to the syndicated loans market is restricted to only the largest firms as the smallest loans typically exceed $50 million. The main advantages of this form of borrowing are:

arranging a syndicated loan is less costly, in terms of set-up fees, compared with a bond issuance;

borrowers can achieve lower spreads than they might have to pay to individual banks if they intended to borrow through a series of bilateral bank borrowing;

syndication can also provide a more flexible funding structure which guarantees the availability of funds in the currency of their choice;

it widens a company's circle of lenders through syndicates that include foreign banks;

a syndication provides the borrower with a stable source of funds which is of particular value in the event that other capital markets (such as the bond market) are subject to disruption;

syndication allows borrowers to raise larger sums than they would be able to obtain through either the bond or equity markets under a time constraint;

the facilities can be arranged quickly and discreetly which may be of value for certain transactions such as takeovers; and

commitments to lend can be cancelled relatively easily compared to borrowing via securities markets where such actions could have an adverse impact on investor confidence.

Syndicated credits are priced according to the perceived credit risk of the borrower - this is the risk that a borrower may default. This is translated into a margin (or spread) over LIBOR or some other interbank benchmark rate. Higher credit risks, therefore, pay larger margins above LIBOR for their syndicated loans. Pricing is in

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lOOths of a per cent, known as basis points. For instance, a top class AAA borrower may pay only 50 basis points (0.5 per cent interest) over LIBOR, where a high-risk borrower may pay 300 basis points (3 per cent) above LIBOR. Pricing obviously varies according to the type of borrower, purpose of loan, whether the loan is secured or not and other factors. Typically, the size of the margin increases with credit risk. Around 35 per cent of syndicated loans are given a credit risk weighting by the credit rating agencies. The scheme used by Standard & Poor's and Moody's to assess credit risk is shown in Table 4.1. Triple-A rated loans have the

Box 4.4 Multinational telecoms' funding of 3-G licences and syndicated lending

A recent example of how international firms rely on banks for their funding relates to the telecom industry's financing of its 3-G (third generation) mobile telephony licences. Since 1999, European and other governments raised billions by auctioning these licences to the world's largest telecom firms, and the latter have been burdened by inordinate levels of debt ever since. In fact, global telecoms' share prices have been depressed since 2000 after the realisation that they paid too much for these licences. The money that was raised to pay for these licences was predominantly funded by the syndicated loans market.

The syndicated loans market is best known for funding the financial requirements of less-developed countries and comes to prominence when a country defaults or has difficulties in making loan repayments on its debt. Famous cases include the Mexican default in 1982 and more recently Argentina's near default at the end of 2001. Although much is said about groups of banks (syndicates) lending to developing countries and the problems of Third World Debt, much less is made of syndicated lending to developed countries and large firms - although this constitutes the bulk of the market. The main point is that in the scramble to raise billions of dollars to finance the 3-G licences, the world's largest telecoms firms had to resort to this market in addition to more traditional bank financing. Various commentators have noted that the largest Swedish banks are now heavily exposed to the sector as a result of their financing Nokia's, Ericsson's and other telecoms' bids.

Another reason why the international telecoms firms resorted to raising finance via the syndicated loan market was because of the relatively depressed nature of the international corporate bond and equity markets over this period. In general, in periods of buoyant capital markets large firms will raise funds in the capital markets, as it is cheaper than borrowing from banks. When markets turn down then banks become an alternative (sometimes the only) source of finance. This is why the banking system is sometimes referred to as the 'lender-of-last resort' to big