International Financial Management

In January 2015, Reliance Industries, an energy company and India's second largest company by stock market value, raised $1 billion in the global bond markets, helped by the following consortium of international banks: Standard Chartered Bank, Bank of America Merrill Lynch, HSBC, Citigroup, ANZ, Barclays, BNP Paribas, Crédit Agricole CIB, Deutsche Bank, JPMorgan, Morgan Stanley, and RBS. The banks directly approached investors throughout the world's major financial centers, such as Singapore, Hong Kong, London, and New York. Demand for the bonds was strong, which allowed for aggressive pricing and a relatively low interest rate for an emerging market company. The deal vividly illustrates how large companies use international debt markets to pull in as many investors as possible to meet their financing needs. If Reliance had tried to raise a billion dollars strictly in the Indian capital markets, it would have faced a much higher cost of funding, and it would not have been able to raise nearly as much capital at the same terms.

The goal of this chapter is to describe the various funding sources for debt that are available to MNCs in an increasingly globalized world and to examine what makes MNCs choose particular options. It is critical for a financial manager to understand the various worldwide markets that can be tapped to borrow money, and this chapter covers important institutional details regarding international bonds and bank lending. At the same time, it is also important to realize that free lunches are hard to get, and we carefully discuss how to compare different debt options with different characteristics, e.g. in terms of maturity and currency denomination, on an apples-to-apples basis.

The Global Sources of Funds for International Firms

The sources of funds for an MNC (and its subsidiaries) can be split into two major categories: cash that is internally generated by the MNC and cash that is externally provided from the debt markets or the equity markets. Exhibit 11.1 surveys the various sources of funds for an MNC, starting at the top with internal sources of funds reinvested in the company.

The potential sources of external capital are extremely wide ranging. Both bonds and stocks (debt and equity financing) can be issued by a firm and sold to investors, typically through the financial intermediation of an investment bank. These externally issued securities are often tradable in secondary markets.