Connexion loan

Copyright ©2003 Ian H. Giddy Global Banking and Lending

Connexion loan

Tuesday: Bank and Bond Financing

Don Pedro Hydro

Westpac Eurobonds

Cap des Biches


Cap des Biches:Choices for the BCEAO

Foreign-exchange intervention Money-market intervention (consider

interaction with monetary policy) Fiscal policy--the demand side Tariffs and subsidies Exchange controls and capital controls

(and jawboning)


Cap des Biches:Choices for GTI-Dakar

“We must decide whether it’s worth covering our dollar exposure, given the forward premium and relative interest rates.”


Cap des Biches:Choices for GTI-Dakar

“We must decide whether it’s worth covering our dollar exposure, given the forward premium and relative interest rates.”

What is the probability of a devaluation? How much? What should GTI-Dakar do?


Cap des Biches:Choices for GTI-Dakar Renegotiate the $30 million loan, replacing it with a loan

denominated in Euros Keep the USD loan in place, but enter into a 6-year

currency swap to effectively convert GTI's payments into Euros.

Hedge the dollar-Euro risk by buying dollars forward, with rolling 3-month forward contracts

Hedge against a possible devaluation of the CFA franc, by selling francs in the 3-month forward market.

Leave the dollar loan unhedged, and pass the cost of any foreign exchange losses on to Senelac, the buyer of GTI's power

Do nothing now but watch the situation carefully and hedge if the risk becomes too great.

Global Banking:Strategy & Techniques

Prof. Ian GIDDYStern School of Business

New York University


Products or Customers?

Sales

Capital

Markets

Corporate

Finance

Customer-Driven

Innovation


Client-Arena-Product Matrix

Pro

du

cts

off

ered

Clients servedMarkets covered


Products

Credit products Trading and positioning Risk management products Financial engineering and structured

finance Underwriting and distribution Asset management Retail and private client services Transactions services


Alternative Bank-Industry Linkages

The Equity-Market System

The Bank-Based System

The Bank-IndustrialCrossholding System

The State-centered System

Investment Vehicles

Industrial Companies

Individuals

Banks

IndividualsBanks /

Investment VehiclesIndustrial Companies

Individuals Investment Vehicles & Insurance

Investment Vehicles & Insurance



Banks

Individuals Investment Vehicles & Insurance

Banks /Investment Vehicles

Industrial CompaniesIndustrial Companies

State Institutions


Product Profitability Cycle

Excess returns

Time



Pro

du

cts

off

ered


Build versus buy?



Pro

du

cts

off

ered


Deutsche Bank in USA



Pro

du

cts

off

ered


Sell?


Complementarity and Cross-Selling

WholesaleRetail

Insurance

Asset Management

Citigroup?


Client-Arena-Product Choices for West Afrtican Banks?

Pro

du

cts

off

ered


?

International Bank Financing

Prof. Ian Giddy

New York University


International Banking and Credit

International Banking and the Eurocurrency Market

The Separability of Pricing from Commitment Periods

The Syndication Technique in International Lending

Transferability and Trading of Loans Note Issuance Facilities Euro-commercial Paper Floating-rate Notes


Interest-Rate Parity

$1 (1 + i E$) = ($1/ S t )(1 + iEBP) Fnt

where St is the spot exchange rate (dollars per British

Pound) and Fnt is the forward rate.

Or, to a close approximation,

(iE$ - iEBP) = [(Fnt - St)/St] (365/n) 100

Interest-rate differential = forward premium or discount


Asset-Liability Management

Assets Liabilities

Loans Floating rate Fixed rate


Deposits Short term Long term

Deposits Short term Long term



Assets Liabilities



“Bought money”“Bought money”



Assets Liabilities



Active money

market trading

Active money

market trading


Loan Pricing: Basis and Margin

Assets Liabilities

Loans Prime rate

Loans Prime rate

Domestic

deposits

Domestic

deposits


Loan Pricing: Basis and Margin

Assets Liabilities

Loans Prime rate

Loans Prime rate

Domestic

deposits

Domestic

deposits

Loans Libor-based

Loans Libor-based

Wholesale

deposits

Wholesale

deposits


Transferability of Loans and Off-Balance Sheet Banking

This announc em ent appears as a matter of ex am ple only Augus t 1992

DANSKE DESIGNFurniture Group

DM95,000,000Multicurrency Term Loan

Arranged by

N orthern B ank G roup

Lead ManagerBank of Copenhagen The Industrial Bank of Japan, Ltd

Kansallis-Osake-Pankki Scandinavian Bank Group Swiss Bank Corporation

ManagersAmsterdam-Rotterdam Bank N.V. BHF Bank Crédit Lyonnais

Funds provided byAmsterdam-Rotterdam Bank N.V. Banco Central S.A. Banco Herrero Banque du Midi

BHF Bank Crédit Lyonnais The Industrial Bank of Japan. Ltd The Irish Poets' BankKansallis-Osake-Pankki Scandinavian Bank Group Swiss Bank Corporation

N orthern B ank G roupAgent Bank


The Syndication Technique in International Lending Syndication is the underwriting and distribution of large

bank loans, a distribution method adapted from the securities underwriting business

Risk reduction in syndicated loans:1. Credit analysis2. Monitoring and control3. Taking a smaller amount of more, diversified assets4. Relying on the monitoring role of the lead bank or banks.

Better information about1. Aggregate amount of lending to any one borrower (especially a country)2. Terms and conditions of other segments of the loan and of other lending to the same borrower.


Trading and Transferring Loans

ASSIGNMENTASSIGNMENT

FULL ASSIGNMENTThe sale of all of the originating

lender’s or assignor’s

rights and interest in a credit facility

to a purchaser or assignee.





ASSIGNMENT

WITH NOVATION

ASSIGNMENT

WITH NOVATION

PARTICIPATIONPARTICIPATION

PARTICIPATIONParticipants have derivative rights,

not direct rights against

(or obligations to) the borrower.




LIMITED VOTING PARTICIPATION FULL VOTING PARTICIPATION FULL PASS-THROUGH PARTICIPATION













ASSIGNMENT

WITH NOVATION

ASSIGNMENT

WITH NOVATION










In a full assignment: The borrower usually acknowledges the assignment The borrower must consent to release of obligation by the assignor The assignee has direct access and enforcement of rights against the borrower The loan agreement and note is transferred to assignee at closing

In a full assignment: The borrower usually acknowledges the assignment The borrower must consent to release of obligation by the assignor The assignee has direct access and enforcement of rights against the borrower The loan agreement and note is transferred to assignee at closing












ASSIGNMENT

WITH NOVATION

ASSIGNMENT

WITH NOVATION










In a participation: The lead bank sells the right to participate in a credit facility or loan Participants have derivative rights,

not direct rights against (or obligations to) the borrower Counterparty risk exists for lead bank

(eg lead bank responsible for funding participants’ shares) Capital rules may affect lead bank

In a participation: The lead bank sells the right to participate in a credit facility or loan Participants have derivative rights,

not direct rights against (or obligations to) the borrower Counterparty risk exists for lead bank

(eg lead bank responsible for funding participants’ shares) Capital rules may affect lead bank


The Separability of Pricing from Commitment Periods The Eurocurrency market permits the separation

of the currency of denomination from the country of jurisdiction.

A seemingly simple loan has inherent a large number of different features and aspects of risk, includingpricing (over short-term LIBOR)commitment (medium term)funding the loan

International bankers isolate these features in order to distribute and to hedge the inherent risks


The International Money Markets

Source: ft.com


Pricing a Loan to BHP

What maturity and currency

do they want to borrow?

Get USD Libor as

cost-of-funds proxyUSD

What is the credit quality

of this borrower?

Set an appropriate

spread over LiborA-

Price the loan


Pricing a Loan to BHP

Get USD Libor as

cost-of-funds proxyUSD

Set an appropriate

spread over LiborA-

Price the loan

www.marketprices.ft.com/markets/currencies/money

pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ratings.htm


Funding the Australian Loan

Three ways to fund:Take domestic Aussie

dollar depositTake EuroA$ deposit

3 MOA$

DEP

3 MOA$

DEP


Funding the Australian Loan

Three ways to fund:Take domestic Aussie

dollar depositTake EuroA$ depositFund with dollars, hedged

into AussiesTake E$ depositDo FX swap: sell USD spot,

buy USD forward

3 MOE$

DEP

FX

SWAP

3 MOE$

DEP

FX

SWAP


Raising the Money:Note Issuance Facilities

A Note Issuance Facility has two tiers Tender panel members (who provide

funds) Underwriters (commit to the availability

of credit)


A RevolverThe Bigfoot Group

£115,000,000equivalent

Committed Revolving Facility

Arranged by

Credit Suisse First Boston Limited

Underwriting Banks

ABN-AMRO N.V. Banque Indosuez Crédit LyonnaisDeutsche Bank Fuji International Finance Limited Banque Paribas

Samuel Montague & Co. Limited County Bank KredietbankBanque Bruxelles Lambert S.A. Citibank Crédit Suisse

Sumitomo Finance International Westdeutsche Landesbank Girozentraleo Finance International Westdeutsche Landesbank

Tender Panel Members

ABN-AMRO N.V. Indosuez Crédit Lyonnais CIBC LimitedDeutsche Bank Fuji International Finance Limited Banque ParibasLTCB International Limited J.P. Morgan County Bank Kredietbank

Banque Bruxelles Lambert S.A. Citibank Crédit Suisse Commerzbank Merrill Lynch Capital Markets Sumitomo Finance International

Salomon Brothers International Westdeutsche Landesbank Girozentrale

Tender Panel and Facility Agent

Credit Suisse First Boston Limited

RUF Structure:ArrangerUnderwriting

banksTender

panelAgent


Laura Ashley

Need lots of money fast?

Have trouble accessing CP market?

Arrange syndicated

creditYES

Confident of always being able

to access the short-term market?

Arrange Euronote

programYES

Arrange RUF or MOF:

Underwritten Euronote program

Need funds? Don’t issue paperNO

Cannot sell paper at L+10bp? Borrow from banksYES

Issue Euronotes or other paper


Comparison of RUF to Put Option

Market spread relativeto LIBOR at which theborrower can issueshort term paper.

Gain or loss relativeto having nounderwritten facility

FEES

CAPSPREAD

LIBORFLAT

0

+

-

Borrower issuesEuronotes

Borrower draws onunderwritten facility

"STRIKE PRICE"


Euro-commercial Paper

ECP is an unsecured promissory note, issued and placed outside the jurisdiction of the currency of denomination.

A Eurocommercial paper facilityBy definition, the facility provides only for the best-efforts

auction of paper; the borrower has no underwritten assurance of availability of funds

Today, most committed facilities are used by those who want a medium term back-up line on which they do not intend to draw--often to back up a U.S. commercial paper facility.

Uncommitted Euro-commercial paper or U.S. commercial paper facilities are used for actually raising funds.


International Bank Lending

DOMESTIC

LOANS

DOMESTIC

LOANS



DOMESTIC

LOANS

DOMESTIC

LOANSEUROMARKET

LOANS

EUROMARKET

LOANS



DOMESTIC

LOANS

DOMESTIC

LOANSEUROMARKET

LOANS

EUROMARKET

LOANSSYNDICATED

EUROCREDITS

SYNDICATED

EUROCREDITS



DOMESTIC

LOANS

DOMESTIC

LOANSEUROMARKET

LOANS

EUROMARKET

LOANSSYNDICATED

EUROCREDITS

SYNDICATED

EUROCREDITSNOTE ISSUANCE

FACILITIES

NOTE ISSUANCE

FACILITIES



DOMESTIC

LOANS

DOMESTIC

LOANSEUROMARKET

LOANS

EUROMARKET

LOANSSYNDICATED

EUROCREDITS

SYNDICATED

EUROCREDITSNOTE ISSUANCE

FACILITIES

NOTE ISSUANCE

FACILITIESEUROCOMMERCIAL

PAPER

EUROCOMMERCIAL

PAPER


Case Study: Connexion

Would you advise Connexion to use a syndicated loan to finance its prospective acquisition?

If so, how would it be structured and distributed?

How should the bank evaluate and price the risk?


Connexion: Group Questions

1. From the perspective of Connexion, what are their main objectives for this financing?

2. What would be the most appropriate product to offer Connexion?

3&10. How was the financing structured? 4. What issues come to mind regarding pricing? 5. How are the banks protected against risks? 6. After the loan is done, what are the main

benefits to the bank, Soc Gen? 7. What are the benefits to the other banks? 8. What could go wrong? 9. Soc Gen: how much profit?


Connexion loan

Tuesday: Bank and Bond Financing

Don Pedro Hydro

Westpac Eurobonds

Cap des Biches


Documents

Connexion loan