09 FNCE 4070 Spring 2012 Posted Global Debt and Equity Markets

8/14/2019 09 FNCE 4070 Spring 2012 Posted Global Debt and Equity Markets

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FNCE 4070: FINANCIAL MARKETS

AND INSTITUTIONSLecture 9: Global Debt and Equity

Markets

With a Discussion of the

Globalization of Financial

Markets and theImplications of Global

Markets for Borrowers

and Investors


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Where is this Financial Center?

Arab Spring Risk. Cairo stockmarket closed from January27, 2011 to March 23, 2011


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Long Term Risk: Investing in the

Japanese Stock Market

January 1984

January 1990+270%

January 1990April 2012

-75%


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Fads in Equity Markets

January 2006

January 2008

+275%

January 2008December 2008

-61%

January 2000January 2006

-17%


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Importance of Capital Markets to

World Economy

330.60358.87

369.24 370.29

401.50

439.62

361.80

418.27

397.50

100.00

150.00

200.00

250.00

300.00

350.00

400.00

450.00

500.00

2002 2003 2004 2005 2006 2007 2008 2009 2010

World's Capital Market as a Percent of World GDP

World's Capital Market % of World GDP


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Institutional Arrangements in

Corporate Funding

The historical institutional patterns of corporateborrowing in various countries have influencedthe development a countrys bond markets and

equity markets. In Japan and Germany, companies have relied less on

equity markets for funds than their counterparts in theU.S. In both of these counties, banking has been arelatively more important source of funds.

In Europe, the close ties between banks and theircorporate clients hindered the development of aEuropean corporate bond market. That changed, however, with the launch of the euro in 1999,

which promoted the development of Europes bond market.


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Importance of Banking Markets for

the U.S., Japan and GermanyBanking Assets as a % of

Countrys GDPBanking Assets as a % ofCountrys Capital Markets

0.0

50.0

100.0

150.0

200.0

250.0

2002 2003 2004 2005 2006 2007 2008 2009 2010

U.S. Banking % GDP

Germany Banking % GDP

Japan Banking % GDP

0.0

10.0

20.0

30.0

40.0

50.0

60.0

2002 2003 2004 2005 2006 2007 2008 2009 2010

U.S. Banking % Capital Market

Germany Banking % Capital Market

Japan Banking % Capital Market


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Changing Corporate Capital

StructuresJapan, Germany & the U.K.

During the early post war years,Japanese corporation reliedheavily on banks and the bondmarkets to finance their capital

structures. In the 1970s, Japanese

corporate debt to equity ratioswere 4 times as high as that ofU.S. companies.

But, by the late 1980s, corporate

Japan and the U.S. had similarleverage ratios. Germany continued to rely

heavily on its banking market. The U.K. paralleled the U.S.

during this time.

Changing Debt/Equity

Ratios, 1977 - 1985

Germany

Japan


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Changing Nature of the Global

Bond Market Historically, the U.S. bond market dominated the global

bond market, with the U.S. market representing a keysource of financing for U.S. and foreign corporations.

However, since the expansion of the European Union and

the advent of the Euro-Zone, Europes importance in theglobal bond market as grown. In 2002, the U.S represented 43.7% of the worlds bond market;

the European Union represented 29.4%. By 2010, the U.S. shareof the global bond market had fallen to 34.3% and the European

Unions share had grown to 32.9%. In 2002, the U.S represented 53.8% of the worlds private bond

market; the European Union represented 29.2%. By 2010, the U.S.share of the global private bond market had fallen to 40% and theEuropean Unions share had grown to 38.9%.


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Individual Country Private Bond

Markets; % of Total, 2002 - 2010

53.8

40.0

3.9

8.3

0.0

10.0

20.0

30.0

40.0

50.0

2002 2003 2004 2005 2006 2007 2008 2009 2010

U.S. % of Private

Bonds

Japan % of Private

Bonds

Germany % of Private

Bonds

France % of Private

Bonds

Newly Industrialized

and Emerging % of

Private Bonds


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Bond Market Growth in Europe:

Pre and Post the Euro


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Bond Market Growth in Europe

Since the Introduction of the Euro


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Classifying the Worlds Bond Markets The worlds bond market can be divided into two

broad groups: (1) the domestic bond market and (2) the international bond market.

(1) The domestic bond market is comprised of allsecurities issued in each country by domestic

government entities and corporates. In this case, issuers are domiciled (i.e., headquartered) in

the country where those bonds are traded.

(2) The international bond market is comprised ofnon-residents borrowing in another countrys bond

markets Furthermore, the international bond market consists of two

groups: (1) Foreign Bonds and (2) Eurobonds.


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Domestic Versus International Bond

Market by Country; % of GDP, 2009


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Foreign Bonds: Characteristics Foreign Bonds are bonds issued by a non-resident

and denominated in the currency of the country inwhich it is being placed (i.e., issued). Example: Ford Motor Corporation issuing a yen denominated

bond in Japan

Foreign bonds are subject to the regulations of the

country in which the bond is being offered. The SEC regulates foreign bond offerings in the U.S.

Historically, the most important foreign bond marketshave been in Zurich, New York, and Tokyo.

Zurich and Tokyo because of low market interest rates; theU.S. because of its large market.

Foreign bonds are often swapped out for anothercurrency.


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The Use of the Foreign Bond Market

In contrast to IPO equity financing, where the majority of

U.S. firms exhibit a strong home bias, in bond financing agrowing number of U.S. issuers are relying more on foreignbond markets for funding.

For example: The percent of all U.S. firms issuing bondsdomestically fell from 92% in 1995 to 82% in 2006.

Additionally, the share of non-financial U.S. firms issuingbonds domestically declined from 95% to 83% over thesame period. Thus, U.S. corporates are increasing their funding presence in

the foreign bond markets.

At the same time, the share of European issuers borrowing

in the U.S. bond market dropped from around 20% in 2000to approximately 9% in 2006. Thus, European firms are increasing turning to their own markets

In addition to issuing more equity in their home markets for debtfinancing


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Unique Names for Foreign Bonds

The financial markets

have come up withunusual nicknames forforeign bonds. Theseinclude: Yankee bonds

Issued in the United States. Matador bonds

Issued in Spain.

Rembrandt bonds Issued in the Netherlands.

Samurai bonds Issued in Japan.

Bulldog bonds Issued in the United

Kingdom.

Kiwi bonds Issued in New Zealand.

Kangaroo bonds

Issued in Australia. Maple bonds

Issued in Canada.

Panda bonds Issued in China.

Kangaroo or Matildabonds Issued in Australia.


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Eurobonds Eurobonds are bonds issued by a non-resident

and denominated in other than the currency ofthe country in which it is being placed. The bonds currency of denomination is referred to as an

offshore currency. Example: Coca Cola issuing a U.S. dollar denominated

bond in Europe.

They are generally issued and sold simultaneouslyin more than one market and thus the advantage ofthe Eurobond market is that issuers can raise largesums of capital from investors all around the world.

Issuers include national governments,

supranational organizations (such as the WorldBank),AAA corporations and global banks. The U.S. dollar is the dominant currency of

denomination for Eurobonds.


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History of the Eurobond Market The first Eurobond (which was also a U.S. dollar

denominated bond) was the July 1963 issue by the ItalianAutostrade (Italian National Highway Authority), led by SGWarburg & Co and issued in London. $15 million; 5.5% coupon; 15 year bonds; listed on the London

and Luxembourg stock exchanges.

By 1972, the market had grown to $5 billion; $42 billion by

1982 and $371 billion by 1995. In the early 1960s, the Eurobond market was mainly a

Eurodollar bond market. Today, the Eurobond market comprises bonds

denominated in all the major currencies and several minor

currencies. For example, in 1996, the Eurobond market included issues

denominated in the Egyptian pound, Polish zloty and Croatiankuna.


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The Main Features of a Eurobond Eurobonds are not regulated by the country of the currency in

which they are denominated. Eurobonds are bearer bonds, i.e., they are not registeredanywhere centrally, so whomever holds (or bears) the bond isconsidered the owner. Bearer status also enables Eurobondsto be held anonymously.

The Eurobond market is largely a wholesale (i.e., institutional

market) with bonds held by large institutions. Pension funds, insurance companies, mutual funds

Since they are denominated in an offshore currency, investorsin euro-bonds assume both credit and foreign exchange risks(if the currency if denomination is other than their homecurrency).

Some publically offered eurobonds trade on stock exchanges,normally in London or Luxembourg. Others are placeddirectly with institutional investors without a listing (privateplacement).


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Rise of the Euro-Bond Market The Eurobond market offers several

advantages for borrowers that may accountfor its rising popularity.

(1) It gives U.S. borrowers access to a wider

range of lenders, enabling them to diversify theirsources of long-term funding.

(2) The market provides a good environment forinternationally active companies to hedge foreign

currency exposures (through offsetting liabilities) (3) finally, through this market companies can

enhance their global profile.


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Nicknames for Eurobonds

Dragons: U.S. dollar denominated bondsissued in Asia.

Shogun: Foreign currency bonds (including

U.S. dollar bonds) issued in Japan

Dim-Sum: Chinese yuan denominated bondissued in Hong Kong.


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Equity Markets

For most of the post WW II years, U.S. equity

markets had routinely attracted the lionsshare of global equity activity, especially frommarkets that were themselves consideredrelatively important (size, liquidity, regulation).

However, following the dramatic evolution inglobalization since the early 1990s, anincreasing number of alternative financial

centers have developed and achieve thelevel of sophistication needed to attract globalequity business.


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Early History of Equity Markets

In 1899, London was the worlds leadingfinancial center, with an estimated 30% of theglobal stock market. The U.S. ranked second with just under 20% but

was gaining momentum. Other Europeancountries held significant market caps, namelyFrance and Germany with 14% and 7%,respectively. (Note only 18 countries had major

stock markets in 1899). By 1970, the U.S. equity markets accounted

for 2/3rds of the worlds total equity market.


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Rise of Foreign Stock Markets

In 1985, the market value of foreign stockmarkets combined exceeded the marketvalue of the U.S. stock market. By 2005, theU.S. share had fallen to 40%, and currently it

is approximately 31% Over this time we have seen an unparalleled rise

in stock markets around the world. Today, almostevery country possess a stock market, and some

with multiple markets. For example: Today India has 23 stock exchanges,

trading over 12,000 companies (Sept, 2011).


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Trends in Global Equity Markets,

2002- 2010

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

2002 2003 2004 2005 2006 2007 2008 2009 2010

%o

fTotal

U.S. % World Equity Market

Japan % World Equity Market

U.K. % World Equity Market

Canada % World Equity Market

Germany % World Equity Market

France % World Equity Market

Rest of the World % World Equity

Market


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But the U.S. Equity Market Still

Dominates: Stock Market

Capitalization, By Country, 2011


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But at the Same Time U.S. Share of

Equity Financing Has Declined


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Which is Represented by a

Declining U.S. Share of Narrowly

Defined (Public Offerings)IPOs


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IPOs by U.S. Companies Done

Entirely Outside of the U.S.


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Cross Listing Equity Shares Cross listing refers to the listing of a company's

common shares on a different exchange otherthan its primary and original stock exchange. Inglobal finance, the term applies to the listing offoreign-based companies on national exchangesother than (and in addition to) its home

exchange. Example of cross listings:

Citigroup currently lists its stock on both the NYSEand the Tokyo Stock Exchange .

Sony Corporation currently lists its shares on theTokyo Stock Exchange, the NYSE and theLondon Stock Exchange.


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Why do Firms Cross List? (1) Improved liquidity: A listing on a more-liquid stock market can potentially

increase a stock's liquidity and produce larger price earnings multiples. Thus, firmswith shares trading in small, less liquid markets may see price benefits from crosslisting in larger secondary markets overseas; thus positive impact on value of thefirm.

(2) Raising capital: Having shares trade in multiple countries increases the ability offirms to raise capital. Cross listing as part of an IPO or secondary offering in theforeign market.

(3) Increasing the firms visibility to potential customers, suppliers andcreditors (e.g., banks and bond markets): Thus, increase sales and expand

funding opportunities. (4) Information quality: A firm's willingness to cross-list its stock on a market withstringent disclosure requirements and strong investor-protection laws can provideoutside investors with information they may need to determine the quality of the firm'saccounting information and financial statements.

(5) Investor protection: This motivation, described in academic research as"bonding," is based on the idea that registration on a US exchange acts as amechanism that voluntarily commits the firm to a higher standard of corporate

governance and investor protection. Bonding therefore might make firms attractive torisk-averse investors who might otherwise be reluctant to invest. (6) Cost of capital benefits: Cross listing may lower a companys cost of capital

through improving liquidity, better corporate governance, and providing direct accessto foreign capital markets. See next slide.


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Impact of Cross Listing on Cost of

Capital (Data: 1970 -1996)Australia Canada U K Europe Asia

Cost of Capital:

Before Cross Listing 13.74% 8.17% 15.56% 8.80% 16.15%

After Cross Listing 12.15% 7.49% 12.91% 8.47% 14.08%

Difference in Basis

Points

-159 -68 -265 -33 -207

Source: Andrew Karolyi, Financial Markets and Institutions,1998.


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Cross Listings for Selected Exchanges

59

77 8087 89

90

99

41

23 2013 11 10

10

10

20

30

40

50

60

70

80

90

100

Singapore

(782)

NYSE

Euronext

US (2312)

London

(2938)

NYSE

Euronext

Europe

(1132)

NASDAQ

(2760)

Deutsche

Brse

(756)

Tokyo

(2293)

Domestic and Foreign Firm Listings; Percent of Total

Firms (#), March 2011

Domestic

Foreign


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History of Cross Listing Dominant host country

listing site (firm listings) 1950s: U.K.: (South Africa

firms) 1960s: France: (U.S. firms) 1970s: U.K.: (U.S. and Irish

firms) 1980s: Japan (U.S. and U.K.

firms) 1990s: U.S. (Canadian and

emerging market firms) 2000s: U.S. (emerging

market firms)

Number of Companies

Cross Listing: 1950s: 114 1960s: 135 1970: 255 1980: 741

1990: 1,350 2000s: 2,784 Total: 5,379* *Number represents gross

listings (thus, not excluding anydelistings which occurred)

Source: (1950s through 1990s)Schill and Sarkisian, Cross-Listing Waves, 2011. WorldFederation of Stock Markets,

Annual Reports, (20002009)


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Distribution of Cross Listings by

Country of Listing: 1950 April 2006Country 1950s 1960s 1970s 1980s 1990s 2000s Total % of

Total

U.S. 5 26 42 263 703 367 1,403 39.1%

U.K. 22 26 63 105 184 71 471 13.1%

Luxembourg 3 5 18 8 133 118 285 7.9%France 22 28 24 64 38 18 194 5.4%

Germany 10 41 129 13 193 5.4%

Switzerland 13 19 28 55 37 14 166 4.6%

Japan 12 110 13 3 138 3.8%Belgium 24 19 24 18 26 11 122 3.4%

Canada 1 1 5 10 23 58 98 2.7%

Total 3,592

Source: Schill and Sarkisian, Cross-Listing Waves, 2011.


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Distribution of Cross Listings by Home

Country of Listing Firm: 1950 April 2006Country 1950s 1960s 1970s 1980s 1990s 2000s Total % of

Total

Canada 16 19 16 177 258 144 630 17.5%

U.S. 49 50 80 181 101 63 524 14.6%

U.K. 2 11 22 65 130 53 283 8.2%Japan 7 55 83 71 18 234 6.5%

Australia 1 3 2 33 102 31 172 4.8%

India 2 1 67 94 164 4.6%

Israel 1 1 20 90 37 149 4.2%S. Africa 18 8 9 10 29 7 81 2.3%

China 16 21 37 1.0%

Total 3,592



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Distribution of Cross Listings by

Industry: 1950 April 2006

Industry 1950s 1960s 1970s 1980s 1990s 2000s Total % of

Total

Electronics 6 12 40 74 178 177 427 11.9%

Financials 3 9 38 95 190 89 424 11.8%

Mining 23 13 16 101 124 89 366 10.2%

Telecom &Media

5 8 7 56 157 82 315 8.8%

ConsumerGoods

9 20 20 64 126 43 282 7.9%

Oil & Gas 10 12 21 65 100 50 258 7.2%

Total 3,592



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Cross Listing on The Tokyo Stock

ExchangeHistory of Foreign Listings End of the Year Data The Tokyo Stock Exchange

first permitted foreigncompanies to list in 1973. 6 companies (5 U.S.

companies) listed that year.

Foreign company listingspeaked in December 1991 at127 (with U.S. companies at78)

By November 2011, thenumber of foreign companies

listed had fallen to 11 (withU.S. companies at 8). http://www.tse.or.jp/english/listin

g/foreign/transition.html

Last foreign company listingwas Citigroup on Nov 5, 2007.

0

20

40

60

80

100

120

140

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2004

2006

2008

Number of Foreign Companies

Number of U.S. Companies
http://www.tse.or.jp/english/listing/foreign/transition.htmlhttp://www.tse.or.jp/english/listing/foreign/transition.htmlhttp://www.tse.or.jp/english/listing/foreign/transition.htmlhttp://www.tse.or.jp/english/listing/foreign/transition.htmlhttp://www.tse.or.jp/english/listing/foreign/transition.html


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NYSE Foreign Company Listings:

1956 2008: Impact of SOX?

Non-U.S. Companies % of Total

0

2

4

6

8

10

12

14

16

18

20

Peak of 18% in 2003; 12% in2008

Foreign companies as a % of total

0

50

100

150

200

250

300

350

400

450

500

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

Peak of 473 in 2002; 410 in2008

Non U.S. Number of Companies


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Demutualization of Stock Exchange Since the turn of this century an increasing number of

stock exchanges have become public traded, for

profit, organizations Historically stock markets were private organizations. However, in February 2001, Germanys stock exchange, the Deutsche

Stock Exchange went public; In July 2001, both the London Stock Exchange and Euronext went

public; On March 8, 2006, the NYSE went public.

Visit the following sites: http://finance.yahoo.com/q?s=NYX&ql=0 http://finance.yahoo.com/q?s=LSE.L&ql=0 http://finance.yahoo.com/q?s=DB1.DE

Implications of publically traded exchanges: Inclusion of exchanges in investor portfolios. Facilitates mergers and take-overs (hostile or friendly) of exchanges.
http://finance.yahoo.com/q?s=NYX&ql=0http://finance.yahoo.com/q?s=LSE.L&ql=0http://finance.yahoo.com/q?s=DB1.DEhttp://finance.yahoo.com/q?s=DB1.DEhttp://finance.yahoo.com/q?s=LSE.L&ql=0http://finance.yahoo.com/q?s=NYX&ql=0


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Consolidations Among Exchanges On September 22, 2000, the Euronext Stock Exchange was

formed through the merger of the national stock exchanges of

France, Belgium, and the Netherlands. In December 2001, Euronext acquired the shares of the London International

Financial Futures and Options Exchange (LIFFE), in 2002 it acquired thePortuguese Stock Exchange.

On April 4, 2007, the New York Stock Exchange and Euronext

merged to form NYSE Euronext. On July 7, 2011, the stockholders of NYSE Euronext agreed to a

merger with the Deutsche Exchange Currently, Brussels is examining possible anti-trust issues and has yet to

approve the merger.

On November 11, 2011, the Tokyo Stock Exchange announcedthat they had agreed to purchase the Osaka Securities Exchangefor $1.68 billion. Merger will be completed by January 2013 andcombined company will be called the Japan Exchange Group.


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Stock Exchange Consolidations In 2006 and 2007, NASDAQ attempted hostile

takeovers of the London Stock Exchange. Both takeover attempts were rejected by LSE

shareholders.

Why are exchanges merging?

(1) cost reductions (to the exchangesthemselves through economies of scale).

(2) to expand global capital raising benefits

(IPOs) to corporations and (3) to provide liquidity (turnover) and global

outreach benefits to investors.


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Appendix 1

The Process of Cross Listing Shares


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Methods of Cross Listing

Cross listing can take the form of either a directshare listing or a depository receipt program.

A Depositary Receipt represents ownership ofequity shares in a foreign company. These

receipts are issued against ordinary shares heldin custody in the issuer's home market.

Depository Receipt Programs American Depository Receipt (ADR): arrangement by which

foreign companies cross list on U.S. exchanges. Global Depository Receipt (GDR): arrangement by which foreign

companies (including U.S. companies) cross list on foreignexchanges, other than U.S. exchanges.


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Depository Receipts A depositary receipt is a claim against specified

number of underlying common stock shares. The DR ratio to the underlying share will vary based

upon the local market share price and, in the case ofan ADR, the US share price of other companies insimilar industries.

DRs can be listed (and traded) on a majorexchanges: For example: NYSE, AMEX, NASDAQ in the U.S. and

London, Luxembourg, or Singapore outside of the

U.S.. DRs may also trade in the over-the-counter (OTC)

markets, or be privately-placed.


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American Depository Receipts

The first ADRs issued and traded in the U.S.occurred in 1927 when JPMorgan listed theretail U.K. company, Selfridge's. ADRs were initially seen as a means of reducing the risk

associated with holding shares overseas and reducingthe trading (clearing) times for American investors.

Today companies from around 80 countries haveADR programs in the United States.

Currently, ADR Depositary receipt volumeaccounts for about 15% of the U.S. equity market.

A i D i R i


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American Depository Receipts American Depository Receipts (ADRs):

Certificates that represent ownership of sharesof foreign companies. ADRs can be listed on any U.S. exchange, such as

the NYSE, the American Stock Exchange, orNASDAQ. They can also be privately placed as Rule144A securities.

ADRs trade in the United States just like shares ofdomestic companies, with each ADR representingsome multiple of the underlying foreign shares.

ADR programs are managed by commercial

banks on behalf of foreign companies. In the U.S. the major depository banks (April 2009data) are Bank of New York (1,732 programs)Citibank (322 programs) and JP Morgan (250programs)


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The Price of an ADR The price of an ADR trading on a U.S. stock

market corresponds to the local currency price ofthe foreign stock in its home market, adjusted tothe ratio of the ADRs to foreign company shares.

Thus, the ADR price also reflects the exchange

rate between the two markets. Example:

ADR ratio of 1:2 for a Japanese company (i.e., eachADR represents 2 shares of the underlying stock)

This stock trades in Japanese market at 1,000 yen pershare and the exchange rate is 95 yen to the dollar.

Given this information, this ADR would trade in theU.S. at $21.05 or (1,000 x 2)/95 = $21.05


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What Causes the Price of an ADR

to Change? (1) Changes in the home currency price of the

foreign company. Price risk resulting from changes in the outlook for the

company.

(2) Changes in the overall stock market of the ADRcountry. Systematic risk.

(3) Changes in the exchange rate between the U.S.dollar and the currency associated with the

underlying asset. Everything else equal: A strong foreign currency will increase the price of theADR.

A weak foreign currency will decrease the price of the ADR.


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Depository Receipt Web-Site

The 3 major U.S. banks offering DR

programs with their web sites are as follows: (1) JP Morgan:

http://www.adr.com/

(2) Bank of New York http://www.adrbnymellon.com/

(3) Citibank

http://www.citiadr.idmanagedsolutions.com/www/front_p

age.idms
http://www.adr.com/http://www.adrbnymellon.com/http://www.citiadr.idmanagedsolutions.com/www/front_page.idmshttp://www.citiadr.idmanagedsolutions.com/www/front_page.idmshttp://www.citiadr.idmanagedsolutions.com/www/front_page.idmshttp://www.citiadr.idmanagedsolutions.com/www/front_page.idmshttp://www.adrbnymellon.com/http://www.adr.com/

09 FNCE 4070 Spring 2012 Posted Global Debt and Equity Markets

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