This report will evaluate the advantages and disadvantages of raising long term debt and equity capital via the global capital markets as opposed to the more traditional methods employed by the company of raising funds through the domestic markets.
Global Capital Revenue v Domestic
Raising capital in the global market place has a number of advantages over raising capital solely in the domestic market place. The first advantage is that by going global it will open the company up a larger market and will provide far more opportunities to raise capital as opposed to only raising capital in the domestic capital market which will severely restrict the number of potential investors. Also by raising capital globally it will lessen the risks involved and associated with raising capital by diversifying the businesses portfolio of investment. It will allow the company to share the risk through several markets as opposed to relying solely on one market. Finally there are also tax benefits to be gained by opening up the portfolio to the global market place. As the capital will be raised in foreign countries the regulations governing it may be different thus the possibility of financial benefits such as tax breaks. The specific advantages and disadvantages of raising capital globally will be discussed in more depth in this report. The following sections will look at the two main ways of raising international finance; international bonds and international equity.
International Bond Markets
The term ‘International Bond Market’ refers to two different types of bond; the foreign bond and the Eurobond. The following sections will look at these two types of bonds and evaluate the advantages and disadvantages.
A Eurobond is issued in the domestic currency of the issuer but sold outside of the issuer’s domestic market. The bond is under written by a syndicate of internationally diverse investment banks and is placed on to the bond market in at least two countries often being realised simultaneously. Examples of Eurobond would be:
Euro – Euro bonds: Any company within the European zone, using the Euro currency to issue the bond
Euro – Dollar bonds: An American company issuing a bond using the dollar as the currency of issue
Euro – Sterling bonds: An English company issuing a bond using sterling as the currency of issue
Advantages of the Eurobond
There is a large market for Eurobonds which gives an immediate advantage to the investor in that there is a vast choice when looking to raise capital in this area. It also means that the market can absorb large and frequent issues of bonds due to the existing size of the market. This market size has the advantage of being incredibly larger and more diverse than the current domestic market.
Eurobonds have become a very popular source of raising finances partially because they circumvent some of the restrictive registration requirements. The less restrictive nature allows greater freedom and flexibility than the domestic bond market as there is no requirement for formal disclosure. Bonds are issued in bearer form which will allow them to be held outside of the country. This has the advantage of being able to avoid any domestic taxation on them. The second advantage of having the bonds in bearer form is that there is a large and readily available secondary market dealing in the bonds. Another advantage gained by the greater flexibility of the eurobond is that it allows a lower rate of interest and a lower issue rates and charges due to it not be regulated by a single body. This therefore reduces the costs of raising finances in this way.
Eurobonds traditionally have a long maturity, on average 15 – 20 years but could be up to 40 years +. This gives assurance to the investor of the funds at a known rate for a long period of time. Bonds can also be issued in different ways or with different options attached. They can be...
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