International Investment Banking - PowerPoint Presentation

1. International Investment Banking

2. EuromarketsEuromarkets is the generic term used in international capital markets for securities issued and held outside the issuer’s country of origin Bonds that trade in this market are called Eurobonds Euromarkets exist to facilitate cross border financings by corporations and sovereign entities and were originally created in response to the Cold War during the 1950s when the Soviet Union deposited their U.S. dollars with European banks in Europe, outside of the control of the U.S. government Due to restrictions on dollar lending activities to foreign companies and ceiling limits on interest rates offered for deposits, U.S. banks also moved significant dollar balances to their merchant banking offices in Europe All of this gave rise to a very large amount of U.S. dollars deposited mostly in London and has led to remarkable growth in the Euromarkets, especially after OPEC countries began depositing U.S. dollars received from oil sales outside of the U.S. during the 1980s

3. Euromarket CentersAlthough London is the unofficial center of the Euromarkets, Frankfurt and Paris are large centers as well Brexit may lead to a decline in London’s market share for European financial services One reason European cities tend to dominate this market is due to their geographic convenience to markets in the Americas and Asia European time zones allowing overlap of a few business hours with the Americas and Asia, while those two regions have no business hour overlap with each other

4. Characteristics of EurobondsEurobonds are generally not registered with any regulatory body For example, while a U.S. corporation’s domestic bonds are subject to SEC oversight, its Eurobonds are not (unless offered concurrently to U.S. investors) Almost all Eurobonds are owned electronically and are settled through either Euroclear or Clearstream, two global electronic depository systemsEurobonds can be issued in many forms, including fixed-rate coupon bonds convertible bonds, zero-coupon bonds, and floating rate notes Eurobonds issued in U.S. dollars are called Eurodollar bonds; Eurobonds issued in Japanese yen are called Euroyen bonds There are many other currencies in which Eurobonds are issued, including pound sterling, euro, and Canadian dollar, among others (the Eurobond is named after the currency in which it is denominated)

5. London’s Financial MarketOne quarter of the world’s largest financial companies have their European headquarters in London There are more than 500 banks and 150 global securities firms that have London offices, more than any other city in the world The London foreign exchange market is the largest in the world, with average daily trading in excess of $5 trillion (more than 33% of all global FX transaction)The London market has captured more than one third of the OTC derivatives market and manages almost half of European institutional equity capital The London Inter-Bank Offer Rate (LIBOR) is being phased out in favor of a Secured Overnight Financing Rate (SOFR), which is measured not with a survey but using actual trade data

6. Japan’s Financial MarketDuring the 1980s, Japan’s stock market skyrocketed to remarkable levels when the price to earnings (PE) ratio for the Nikkei-225 stock index reached above 70x, nearly four times higher than the U.S. S&P 500 stock index PE ratio of approximately 18x This market was buoyed by high real estate prices and an interlocking corporate ownership structure that was common in Japan After reaching a high of almost 39,000 in January 1990, the Nikkei-225 index fell more than 50% during that year and the market has never returned to the historical high

7. Japan’s Leading Financial InstitutionsThere are currently three large banks: Mitsubishi UFJ Financial Group, Mizuho Financial Group and Sumitomo Mitsui Financial Group Each of these banks operates principally as a commercial bank, with somewhat limited securities activities During 2008, in the wake of the credit crisis that weakened many of Wall Street’s investment banks, Mitsubishi Tokyo Financial Group made a significant investment in Morgan Stanley, acquiring approximately 21% of the U.S. firm’s stock The largest pure-play securities firms in Japan are Nomura Securities and Daiwa Securities When Lehman Brothers failed during 2008, Nomura Securities acquired most of Lehman’s businesses in Asia and Europe, substantially bolstering its global investment banking presence

8. M&A in JapanDue to a restrictive regulatory environment, the M&A market in Japan had been slow to develop, but new legislation passed in the last decade helped to accelerate the pace of deal making in Japan In 2003, a new law passed that permitted non-Japanese companies to use their own stock to acquire Japanese companies that were under Japanese bankruptcy court protection This was followed by a 2007 law that further extended the ability of foreign companies to use their stock to acquire Japanese companies, as well as other laws that lowered the threshold shareholder approval requirement for an acquisition As a result, it is likely that M&A activity will continue to increase in the future in Japan

9. Financings in JapanMore than 80% of equity underwriting in Japan is conducted by Nomura, Sumitomo Mitsui, Mitsubishi UFJ/Morgan Stanley, Daiwa, and Mizuho Although foreign investment banks can also underwrite Japanese securities, they have limited distribution networks and therefore most of their underwriting activities However, foreign investment banks sometimes are able to act as a co-lead bookrunner in partnership with one of the big Japanese securities firms for issuers that wish to create an underwriting syndicate with strong distribution capabilities both inside and outside of Japan Japanese corporations have historically relied principally on bank borrowings for their debt financings, resulting in a relatively small Japanese corporate bond market

10. China’s Financial MarketChina’s financial market has seen dramatic growth and increasing sophistication as regulatory barriers have been reduced and the country’s economy has grown rapidly This growth has been facilitated in part by the government’s relaxation of its foreign exchange controls in 1996 Under relaxed regulations, current account renminbi (RMB) became convertible (subject to certain restrictions) into other currencies This was followed in 2002 with the creation of the Qualified Financial Institutional Investor (QFII) program, which allowed qualifying foreign investors to participate in the Chinese equity market via domestic A-shares and in the Chinese debt market Many non-Chinese financial institutions have obtained the QFII designation, enabling them to participate in these markets

11. M&A in ChinaChina’s financial market has seen dramatic growth and increasing sophistication as regulatory barriers have been reduced and the country’s economy has grown rapidly Currently, a large number of state-owned enterprises are being made available for restructuring or partnering with foreign companiesThere is a high level of government participation in all M&A transactions in China, with the Ministry of Commerce and the State Development and Reform Commission focusing on not only anti-trust issues, but also on economic and social consequences In addition, the Ministry of Commerce is the principal foreign investment regulator and has general supervisory and approval authority over M&A transactions, and the State-Owned Assets Supervision and Administration Commission and The China Securities Regulatory Commission are also involved in approving, monitoring and regulating state-owned or listed company M&A transactionsTo conduct business in China, a foreign company must operate through a Foreign Investment Enterprise (FIE) and percentage ownership is often limited to less than 100% FIEs can be set up as joint ventures (JVs), wholly owned foreign enterprises (WOFEs), or foreign-invested companies limited by shares (FCLS)N

12. Stock Markets in ChinaThe Shanghai Stock Exchange and the Hong Kong Stock Exchange are the two largest exchanges in ChinaChinese companies may issue A-shares or B-shares on the Shanghai or Shenzhen exchanges, but A-shares may only be purchased by Chinese residents and QFIIs are denominated in RMB B-shares can be purchased by foreign investors and by Chinese citizens as well; Dividends and capital gains from B-shares can be sent outside of China, and foreign securities firms can act as dealers for these shares Foreign investors and Hong Kong residents (but not mainland Chinese residents) can purchase Chinese shares listed in Hong Kong (H-shares) These shares are issued by offshore Chinese companies or by Hong Kong-headquartered companies that are controlled by or derive significant revenue from mainland Chinese companies: “Red Chip” stock

13. Financings in ChinaUBS, Goldman Sachs, and Morgan Stanley have historically dominated the equity underwriting league tables in Hong Kong for H-shares, but market share has recently been taken away by a group of Chinese securities firms In mainland China, Chinese securities firms, including China International Capital Corp and China Galaxy Securities Co. dominate the rankings for A-share underwritingChina’s bond market has grown very rapidly, with corporate bonds of over $9 trillion outstanding as of 2021 China has established programs that allow foreign investors access to much of the bond market The QFII program allows foreign investors access to both the Exchange bond market and the Interbank bond market

14. Foreign Investment Banking ActivityMost major investment banks have actively pursued business opportunities in China, but tight regulatory controls by the Chinese government have limited the entry of these banks to only certain areas of the domestic market In addition, depending on when the bank entered the Chinese market, the level of authorization has varied according to the legislation in place at that time In general, foreign banks can only participate in domestic securities underwriting through JVs set up with Chinese securities firms where the foreign bank owns no more than a one-third share in the entity Goldman Sachs and UBS set up their JV’s in 2004 and 2005, respectively, and are the only two foreign banks that have been allowed management control over their JVs The three other major foreign banks that have domestic securities underwriting approval (Morgan Stanley, Credit Suisse and Deutsche Bank) only have passive ownership in their JV entities

15. Investment Bank Equity Underwriting in China

16. Emerging Financial MarketsEmerging markets countries are countries in a transitional phase between developing and developed statusConducting investment banking activities in emerging markets countries represents both significant revenue opportunities and correspondingly large risksIncremental risks associated with investment banking business in these countries include currency, political, liquidity, accounting, tax and volatility risks Currencies in some of these countries are subject to rapid, sometimes unanticipated changes based on significant dislocations in a country’s credit or stock marketsMany emerging markets countries are improving their legal system to better support enforcement of contracts and are also improving disclosure requirements and corporate governance practices

17. Emerging Market Countries

18. Financings in Emerging MarketsSyndicated loans have historically been the key source of new capital for emerging markets countriesIn order to mitigate losses for banks when most of these loan defaulted in the 1980s, Brady bonds were created in 1989: bonds were issued to banks that were guaranteed by various governments and collateralized by U.S. Treasury 30-year zero-coupon bonds purchased by the debtor country and then exchanged for bank non-performing loans, allowing banks to remove the bonds from their balance sheets and the borrowers to pay off existing debt and issue new debtMany emerging market countries have removed barriers to foreign investor purchases of equity, but there are still some limitations on the trading activities of international investment banks The principal equity trading activity in emerging market countries relates to ADR (American Depositary Receipt) and GDR (Global Depositary Receipt) issues by some of the larger companies in the emerging markets

19. M&A Activity in Emerging MarketsMost large investment banks have reasonably active emerging markets M&A businesses Risks must be carefully balanced against expected returns to be successful in this marketIn particular, intellectual property, political, legal, currency, operational and financing risks are much higher in emerging market countries and should be factored into deal considerations In an M&A DCF valuation, WACC should be adjusted higher, depending on the country and it is also important to consider a wide range of potential growth rates, depending on the countries involved

20. American Depository ReceiptsAn American Depository receipt (ADR) represents U.S. investor ownership of a non-U.S. company stockADRs are issued by U.S. depositary banks and deposited with a custodian (agent of the depositary bank) in the country of issuance, giving an investor the right to obtain the non-U.S. shares held by the bank (although in practice investors usually never receive the shares)Investors can obtain ADRs by purchasing in a registered securities offering (e.g., IPO) or in secondary trading; In certain circumstances, investors may be able to purchase the shares outside the US in another currency and deliver them to the depositary in exchange for a new ADR Investment banks are actively involved in helping non-U.S. companies list their shares in the U.S. in the form of ADRs , enabling these companies to utilize ADRs to raise capital, increase liquidity, expand U.S. market awareness of the company and, sometimes, as an acquisition currency

21. Sovereign Wealth FundsSovereign Wealth Funds (SWFs) have become a major source of funding for international capital raising, controlling over $8 trillion in investible assets and another $7 trillion held in other sovereign investment vehicles Some governments have restricted SWF investment in key companies: for example, Germany prevented a Russian SWF fund from making a major investment in Deutsche Telekom The U.S. signed agreements with Abu Dhabi and Singapore that established a basic code of conduct for SWFs and the countries in which they invest One of the major principles established in this agreement was the idea of investment decisions driven solely on commercial grounds and not geopolitical motives Political considerations make it hard to predict the long-term impact of SWFs on the global equity and M&A markets