NATIONAL CAPITAL MARKET
AND INTERNATIONAL FINANCING
G
A
L
I
H
Someone is sitting
in the shade today
because someone
planted a tree
a long time ago.
Warren Buffett
ReferenceMultinational Finance Management 8th Edition, Shapiro, Alan C., 2006.
+ Additional material from Investopedia & Wikipedia.
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Corporate Sources & Uses of FundsFinancial Markets vs Financial Intermediaries; Globalization of Financial Markets
National Capital MarketsAs International Financial Centers
Development BanksWorld Bank Group; Regional & National Development
Project FinanceFinancing large-scale capital investment
Learning Objectives
To describes trends and differences in corporate financing
To define securitization and explain the forces that underlie it
To explain why bank lending is on the decline worldwide
T o explain what is meant by the globalization of financial markets
To identify the functions and consequences of financial markets
To describe the links between national and international capital markets
To explain why firms may choose to raise capital overseas
To descibes the types and roles of development banks
Source of Funds
Internally Generated Cash
Short-term External Fund
Long-term External Fund
External finance come from investor / lender.
Debt is the preferred alternatives – accounts for the overwhelming share of external funds.
While, New stock issues play a relatively small and declining role in financing investment.
Whether debt/ equity, the issuer will turn to investment banker to assist in designing and marketing the issue.
And compensated by the spread between the price at which they buy the security and the price at which they can resell it to the public.
Financial Intermediaries
VS
Financial Markets
Financial MarketAny market place where buyers and sellers participate in the trade of
assets such as equities, bonds, currencies, & derivatives.
Typically defined by having transparent pricing, basic regulations on
trading, costs and fees and market forces determining the prices of
securities that trade.
Financial IntermediaryAn entity that acts as the middleman between two parties in a financial
transaction.
Typical intermediary: commercial bank. Also includes investment banks,
insurance companies, broker-dealers,mutual funds and pension funds.
Investopedia
Securitization is the process
through which an issuer
creates a financial instrument
by combining other financial
asset and then marketing
different tiers of the repackaged
instruments to investors.
Investopedia
Print screen from
Bank Borrowing
Corporate BorrowingU.S. & British industry
German, French, & Japanese industry
Trends in external financing:
Recent technological & telecommunications
improvement have greatly reduced the
cost of obtaining and processing
information about the conditions that affect
the creditworthiness of potential borrowers.
“
Investors are now more likely to find it cost-
effective to lend directly to companies rather
than indirectly through financial
intermediaries, such as commercial
banks.
“
So…?
Financial Market…win?
FINANCIAL SYSTEMS &
CORPORATE GOVERNANCE
Different financial system in terms of Corporate Governance
Market-oriented financial system
in U.S. and U.K. (refer to Anglo-Saxon model).
Bank-centered finance financial system
in Germany, France, & Japan (CEJ type financial system).
Keiretsu
is a large industrial grouping with a major
bank at the center. Keiretsu ties a complex
web of tradition, cross-shareholding,
trading relationship, management, and
information swapping.
Wikipedia
The one-set policy
BANK
The cost of accessing
capital market directly
=Japanese companies
turn to corporate bond
=Shareholder-oriented
management approach
The world has become one vast,
interconnected market. Markets
for government securities &
certain stocks, foreign exchange
trading, interbank borrowing &
lending, operates continously
around the clock and around the
world in enormous size.
“
Freer
Markets
Widely
available
information
Foundation for
Global
growth
National Capital Market
as International Financial Centers
Factors Promoting Well-Functioning Markets
Secure property right Contract easily enforceableMeaningful accounting information Transparent financial statement Accountability of borrowers & investors Borrowers & Investors bear the consequences of their decisions
Financial Functions Mobilize saving Allocate resources Facilitate risk transfer & risk mgt.Monitor managers Exert corporate control Supply liquidity
Consequences Greater capital accumulation Better projectsMore innovationManagerial accountability Preffed time pattern of consumption
Result Stronger economic growth Greater consumer satisfaction
International Financial Markets
Financial markets where foreigner can both borrow and
lend money
Important Int’l Financial Center
London Tokyo New York Germany & France
Entrepots
Channels through which foreign fund pass
Switzerland, Luxembourg, Singapore, Hongkong, Bahamas, Bahrain
Requirement for becoming In’t Financial Center
Political Stability Minimal government
intervention
Foreign Access to
Domestic Markets
The Foreign Bond MarketPortion of the domestic bond market that represents issues
floated by foreign companies or governments
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The Foreign Bank MarketPortion of domestic bank loans suppllied to foreigners for use
abroad
2
The Foreign Equity MarketPlacing stocks in foreign market – to diversify the equity
funding risk
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Globalization of Financial Market
has its Downside
Critics for Financial Market globalization: The investors only seeks for the highest risk-adjusted return, they will swift to abandon countries whose economic fundamentals are questionable. They will demand bigger premium for the risk of holding the country, It will lead to the devaluations of the country’s currency. The devaluation raises the cost of imports and boost its interest rate.
Financial markets are in the business of
gathering and processing information from
savers and borrowers around the worlds in
order to perform their real function, which
is to price capital and allocate to its most
uses.
Markets reflect the perceptions of risk and
reward of its participants, and do not
create the underlying reality that caused
the bad perceptions of Financial Markets.
Development BankWorld Bank Group, Regional & National Development Bank
Three types of Development bank:
Regional Development Banks
• provide equity & debt financing to aid in the economic development of under developed areas.
• Include extending intermediate- to long-term capital directly.
• strengthening local capital markets.
• supplying management consulting services.
Function of Development bank:
World Bank Group: multinational
finance institution that was
established at the end of WWII to
help provide long-term capital for
the reconstruction and development
of member countries.
IBRD
IBRD makes loans for projects of high economic priority.
A government guarantee is a necessity for World Bank funding.
Bank’s main emphasized on large infrastructure projetcs (roads, dams, power plant, education, & agriculture).
Loans are tied up to debtor nations economic policies: freer trader, more open investment, lower budget deficits, & more vigorous private sector.
IFC
Finance various projects in the private sector through loans and equity participations and to serve as a catalyst for flows of additional private capital investment to developing countries.
Doesn’t require government guarantees.
Emphasized on manufacturing firm that have reasonable chance of earning the investor’s rate of return and will provide economic benefits of the nation.
Concentrate its lending & equity in investment-grade-conglomerate.
Help companies to conduct business in a more open and investor-friendly manner.
IDA
Founded in 1960, to makes loans (soft/ highly concessionary) for project in LDCs.
Require a government guarantee.
Regional Development Bank
Provide funds for financing of manufacturing, mining, agriculture,
& infrastructure projects considered important to development.
Regional Development Banks
European Investement Bank (EIB)
Inter-American Development Bank (IADB)
Atlantic Development Group for Latin America (ADELA)
Asian Development Bank (ADB)
Leading Regional Development banks:
African Development Bank (ADB)
Arab Fund for Economic & Social Development (AFESD)
National Development Bank
Have the same characteristics of success: they must attract
capable, investment-oriented management; and they must have large enough supply of economically viable projects.
Project Finance
Project FinancingThe raising of funds to finance a project in which the providers of
the funds look primarily to the cash flow from the project as
the source of funds to service their loans and provide the return
of and a return on their equity investment in a project.
Key AttributesOf project financing :
Focus on the economically separable nature of investment projects
suitable for project financing.
Nonrecourse lenders have resort only to the project assets and cash
flows (no sponsor).
The underlying assets in project are large, illiquid industrial assets.
Project have a finite life, at the end of which all debt and equity
investors are repaid.
Competition among companies for capital
force them to be more financial transparent, and
improve corporate governance with greater focus on
the rights of shareholder rather than managers.
Presented By: Galih H. Baskoro