GLOBAL

CAPITAL MARKET
OFFERS
(CHAPTER 10)

Copyright © 2017 McGraw Hill Education, All Rights Reserved.

PROPRIETARY MATERIAL © 2017 The McGraw Hill Education, Inc. All rights reserved. No part of this PowerPoint slide may be displayed, reproduced or distributed in any form
or by any means, without the prior written permission of the publisher, or used beyond the limited distribution to teachers and educators permitted by McGraw Hill for their individual
course preparation. If you are a student using this PowerPoint slide, you are using it without permission.
GLOBAL CAPITAL MARKETS

 International capital markets thrive on

favourable investment climate and destinations
which encourage free capital flows.
 International capital market originated in
London but spread to all developed economies
through the euro market.
 International listing centres – US, London and
EU centres, Tokyo, Hong Kong, Singapore and
NASDAQ Dubai.
GLOBAL CAPITAL MARKET OFFERS

 Pure Bond markets –

 Domestic Bond
 Foreign Bond
 Euro Bond
 Bonds can be issued in public offers or through
private placement (Rule 144A in the US).
 Bonds are usually medium to long term unsecured
securities issued as promissory notes.
 Foreign Currency Convertible Bonds (FCCBs)
 Equity linked offers made through the
depository mechanism.
INTERNATIONAL BOND MARKETS

 Domestic Bonds – Bonds issued by domestic issues in domestic

markets designated in local currency.
 Foreign Bonds – Bonds issued by foreign issues in domestic
markets designated in local currency. Yankee bond, Samurai,
Shibosai, Shogun Bull Dog, Rembrandt bonds are examples.
 Eurobonds - These are bonds that are issued and sold in a
jurisdiction outside the country of denomination. Euro bonds
are denominated in a currency other than the local currency. By
their nature, eurobonds are multi-jurisdictional. Born in 1964
due to stiff regulatory and tax requirements in US markets,
eurobonds are the largest in international bond markets.
 Bond Structures – usually long terms bonds and medium term
notes, highly rated and unsecured floating rate notes. Perpetual
bonds are also found.
 Exotic structures such as inverse floaters, yield curve notes, bond
with caps and collars etc.
FOREIGN CURRENCY CONVERTIBLE BONDS

 FCCB is a bond issued by an Indian company expressed in

foreign currency, and the principal and interest in respect of
which is payable in foreign currency.
 FCCBs are required to be issued in accordance with the scheme
notified by the Government of India, Ministry of Finance,
Department of Economic Affairs viz., ‘Issue of Foreign
Currency Convertible Bonds and Ordinary Shares (Through
Depositary Receipt Mechanism) Scheme, 1993’.
 They are subscribed to by a non-resident in foreign currency
and convertible into equity shares of the issuing either in whole
or in part. A warrant structure is also permitted.
FOREIGN CURRENCY EXCHANGEABLE BONDS

Exchangeable Bond Issue Structure

Issues EBs
Holding Co. Holding Co.

Ownership of X% EB
Holders
Ownership of
(X-t)% retained
Ownership
Sub. Co. of t%

Sub. Co.

At the time of Issue of EBs At the time of Exchange of EBs

INTERNATIONAL BOND STRUCTURES – INDIAN CASES
 Tata Steel – Tata Steel raised $1.5 billion via dual tranche dollar bonds
in overseas market through its Singapore arm Abja Investments. It was
a dual tranche dollar denominated bond. It is a debut dollar issuance by
Tata Steel.
 It was the second largest bond issue from India after that of ONGC
Videsh. It was the largest sub-investment grade deal in Asia in 2014.
 The issue was made to raise funds to refinance its debt obligations of
TATA EUROPE (formerly known as Corus).
 Key features of the bond issue:
 First tranche include $500 million of tenure of 5.5 yr bond at a

coupon rate of 4.85% over US Treasury. Second tranche include $1

billion of 10 yr tenure at a coupon rate of 5.95% over US Treasury.
 The issue was guaranteed by TATA STEEL

 Rated BB+ by Fitch and BB by S&P, the bonds listed on Frankfurt

Stock Exchange.
INTERNATIONAL BOND STRUCTURES – INDIAN CASES

 The deal had overwhelming response from investors, as

reflected in order book and final pricing. . This landmark deal
shows investor confidence in Tata Steel credit and its leading
position in the global steel industry .  
 It had a peak order book of $ 11 billion across tranches by the
time the books closed at the end of the day and this enabled the
issue to be priced about 50 basis points tighter than the initial
price thoughts on both the tranches. The issue was distributed
59 per cent into Asia and 41 per cent into Europe, the Middle
East and Africa (EMEA) and others to several long term buy-
and-hold institutional investors, banks and private banks.
INTERNATIONAL BOND STRUCTURES – INDIAN CASES

 ONGC Videsh –OVL, the overseas arm of ONGC along with

ONGC bought 10 per cent stake in Mozambique's Rovuma basin
from Videocon Industries for $2.48 billion in June 2013. The
stake between OVL & ONGC was split in the ratio of 60:40. To
finance its 6 per cent buy, OVL in January 2014 raised $1.5
billion one-year bridge loan facility from a consortium of 9
banks. In August 2014, OVL acquired another 10 per cent stake
in the field from Anadarko Petroleum Corp for $2.64 billion. To
pay for the Anadarko stake acquisition OVL raised $2.5 billion
in foreign loans. Together the 16% stake led to a whooping debt
which OVL planned to refinance through a bond issue.
 The bond issue raised over $ 2.2 billion in dual currency
denominated tranches, the dollar and Euro in the overseas
market.
INTERNATIONAL BOND STRUCTURES – INDIAN CASES

 This is the biggest bond issue from India so far crossing Bharti
Airtel’s $ 2 billion foreign currency bond in May 2014.
 The bonds were raised in 3 equal tranches of 5-year US dollar
bond, 10-year US dollar bond and 7-year euro bond. The issue
had the order book of over $8 billion due to renewed investors'
interest in the India energy story. This was a true benchmark
deal in terms of size, tenors, currency mix and pricing,
evidencing the global investor appetite for quality Indian credits
and strength of OVL and ONGC credit.
 The 5-year US dollar bond was priced at 160 basis points (bps)
over benchmark US treasury (coupon 3.25%), while the 10-year
US dollar bond was priced at 207.5 bps above the benchmark
(4.622%). The 7-year euro bond was priced at 180 bps over mid-
swaps (2.5%). 
 INTERNATIONAL BOND STRUCTURES – INDIAN CASES
 Reliance Communications – Global Cloud Exchange Ltd, ED, a
subsidiary of Reliance Communications raised $ 350 million
through debt bond issue from overseas market. The issue was made
in 2014 mainly to refinance debt of parent company.
 The notes priced at 100% with a coupon of 7 % were non-callable
senior secured Regulation S/ Rule 144A Fixed Rate Notes maturing
in 2019. $ 250 million of the proceeds will be used to refinance the
Standard Chartered Bank Loan Facility entered into by Reliance
Globalcom B.V., and the remaining proceeds will be used for capital
expenditure and general corporate purposes.
 The bonds received overwhelming response from the market, and
were significantly oversubscribed. The issue was allocated 22% to
the US, 29% to Europe, and 49% to Asia. By investor type, 78% of
the issue went to fund managers, 13% to hedge funds. 6% to private
banks and 3% to other investors.
INTERNATIONAL BOND STRUCTURES – INDIAN CASES

 BPCL – BPCL had raised 175 million Swiss Francs through an

overseas bond sale at a competitive coupon of 2.988% which is
235 basis points  above the Swiss mid-swap rate, in a 5.75-year
money. The money was raised to meet the working capital
requirement of the Company. The notes were rated at the same
level as BPCL's issuer default rating of 'BBB-' as they will
constitute direct, unconditional, unsubordinated and unsecured
obligations of the company.
INTERNATIONAL BOND STRUCTURES – INDIAN CASES

 RIL Perpetual Bond – RIL raised $800 million (Rs 4300 Cr)
through perpetual bonds from overseas market to fund its Rs. 1 lakh
crore capex plan to expand petrochemicals business and ramp up oil
and gas exploration in the next three to four years.
 The bond has a coupon rate of 5.875%, making it the first issuance
of perpetual bond below 6% in the world. There is no coupon step up
or rate reset in the pricing of the bond.
 A perpetual bond by definition has no option to repay the principal
amount and it is seen as one of the cheapest ways for raising capital.
However, RIL has a call option at the end of five years. The bond is
listed and bond holders can exit through the secondary market.
 The only other domestic company to issue a perpetual bond is Tata
Power through its overseas subsidiary in 2012 in a hybrid structure.
INTERNATIONAL BOND STRUCTURES – INDIAN CASES

 This transaction is significant on various accounts –

 First ever US Dollar senior, fixed for life, non-deferrable perpetual
issuance out of Asia
 Lowest coupon achieved for a US Dollar senior true perpetual
issuance globally to date
 Largest perpetual issuance and lowest coupon by an Asian company
in 2013 YTD (including subordinated and hybrid structures)
 First US Dollar bond issuance by RIL in the public markets since
1997
 The issue got an overwhelming response as it was oversubscribed
four times with almost USD 3 billion. The Notes were distributed to
high quality fixed income accounts: around 53% to private banks
and 47% to institutional investors.
INTERNATIONAL BOND STRUCTURES – INDIAN CASES

 M&M NCD Issue – Mahindra Finance through this Debt

private Placement came out with India’s first 50-year rupee
bond in 2013. It was a benchmark deal as it explored the
unchartered territory of maturity and extended the Corporate
bond yield curve beyond the 30 years in the Indian bond
market.
 The issue size was Rs. 500 crore and the instrument was a
listed, rated, unsecured, senior, redeemable NCD with a
coupon of 9.55% payable annually.
 There is no put or call option on the NCD.
 The issue was well received and fully subscribed.
DEPOSITORY MECHANISM

 A depository is a security that represents

ownership in a foreign security. Therefore they
are negotiable securities in a foreign jurisdiction
that represent are generally used for a
company’s publicly traded domestic equity.
 An ADR is an American security that is issued
through a public offering in the US which
requires SEC registration.
 A GDR is issued anywhere in the world through
a public offer but only through private
placement (Rule 144A) in the US.
DEPOSITORY MECHANISM

 DRs are issued through a global depository who is a

service provider. The depository’s function is to
administer the DRs for individual investors and related
administrative work.
 DRs are listed and traded on the exchange and also in
the OTC market in other territories.
 The depository mechanism creates two distinct pools of
securities for the same issuance, one in the parent
jurisdiction and one in the foreign jurisdiction.
 In the domestic jurisdiction, the shares are held with the
custodian. The custodian acts as an interface between the
two depositories in each jurisdiction.
 There would be investment banks associated with the
issue in both the jurisdictions.
ADR / GDR ISSUES

The Scheme of Depository Receipts

Depository Shares underlying

Receipts the Depository
Receipts

1. These are issued in jurisdictions other

than the issuer’s domestic jurisdiction
2. These are listed and traded on stock
exchanges and the OTC market.
3. These are administered through a global
depository.
4. The investors subscribe to and are allotted
these instruments.
5. These instruments are issued against the
underlying shares issued by the company
in the name of the depository.
6. The holders of these instruments are not
members of the company; therefore they
do not have direct voting rights.
1. These are issued in the local jurisdiction of
the issuer company.
2. These are not tradable in the domestic
market since they are held by the custodian.
3. These are administered through the domestic
custodian.
4. The global investors are not issued these
instruments.
5. These are issued against the cash received
from investors.
6. Shares are issued in the name of the global
depository.
 Schematic Representation of an Issue of Depository Receipts (DRs)

Foreign Jurisdiction Domestic Jurisdiction

Investors Issuer company

Remit Issues shares

subscriptions,
Maintains surrenders DRs
individual accounts, for conversion Custodian (holds
dividends, bonus etc
non-tradable
shares)

Issue proceeds are remitted in

Global depository (usually convertible foreign exchange.
a bank). Administers the
tradable DRs. Uses
international clearing
systems.

Foreign Investment Bankers Domestic Investment Bankers

Lead Managers to the Issue. Indian advisers to the
(Book runners and lead company on the overseas DR
syndicate members for issue.
underwriting and marketing)
DEPOSITORY MECHANISM

 DRs facilitate trading for foreign investors in

their local jurisdictions.
 Facilitates compliance with local regulation.
 There would be no incidence of capital gain in
the local jurisdiction of the issuer.
 DR investors need not be involved in corporate
decisions.
 No foreign exchange risk.
American Depository Receipts

 Level I – no listing, company does not raise

funds, no compliance with SEC regulations, no
compliance with US GAAP.
 Level II – listing allowed, company does not
raise funds, registration statement to be filed
with SEC, no compliance with US GAAP.
 Level III - listing allowed, company raises funds,
registration statement to be filed with SEC,
compliance with US GAAP.
 Rule 144A - no listing, company raises funds, no
compliance with SEC regulations, no compliance
with US GAAP.
Fungibility And Reverse Fungibility

 Fungibility denotes homogeneity and

convertibility of DRs into shares. Reverse
fungibility would mean the opposite.
 Investor can opt to convert DRs into shares and
sell in local market rather than in home country.
 However, an Indian shareholder cannot opt for
reverse fungibility on individual basis. The
company has to involve itself by sponsoring a
GDR/ADR issue or re-issue such DRs through
secondary market purchases in India.
 Reissue is subject to availability of head room
based on local laws on foreign shareholding.
Sponsored Issue

 In a sponsored issue the company appoints a

lead manager and invites domestic shareholders
to offer their for being sold as DRs in the
overseas markets. It is akin to an offer for sale
except that the transaction is spread over two
jurisdictions. The funds received from sale of
DRs are remitted to the shareholders.
 The company does not raise any funds in a
sponsored issue. The issue expenses are borne
by the selling shareholders.
IDR AND FCCB

 IDRs are the reverse of GDRs.

 Can be issued in India by overseas companies under the
IDR guidelines.
 FCCBs are low yield bonds (typically not more than 2%
yield) until they are converted and therefore require
clearances under the ECB policy.
 FCCBs can be issued both under the public offer and
private placement route.
 FCCBs issued by Indian companies should not be
redeemed within 5 years if conversion is not exercised.
In recent times, several issuers of FCCBs went in for
restructuring the older issues with new FCCBs with ‘in
the money’ conversion options to investors.
ISSUE PROCESS

 Offer Literature preparation – ‘Comfort Letter’

 Filing of Preliminary Prospectus with regulator,
‘Quiet Period’
 Road Shows
 Pricing, underwriting contracts
 Registration Statement ‘effective’
 Allocations and settlements and closing
 Trading
CASE STUDY – ALIBABA

 Alibaba’s IPO (2014) of $ 25 billion is the largest IPO ever till date in
the world surpassing Agricultural Bank of China ($ 22.1 billion in 2010)
and Visa ($19.1 billion in March 2008). IPO was for 320m ADS with a
green shoe of 48m. With the IPO, it became the 4th largest market cap in
technology space after Apple, Google and Microsoft.
 Primarily a Softbank backed company, later on Yahoo owned 40%.
Yahoo sold 17% prior to the IPO through a negotiated deal / OFS.
Softbank held 34% and Jack Ma 18%.
 The listed company Alibaba Group Holding Ltd is registered in Cayman
Islands. It operates in China through many subsidiaries and affiliates. It
has several layers of intermediate holding companies due to Chinese
FDI regulations.
 Alibaba was started as a partnership with a large team of management
partners who had control. This was why it listed in USA and not in Hong
Kong which did not allow dual class shares.
CASE STUDY – ALIBABA

 Alibaba was profit making at the time of IPO. GMV $240b,

topline $8b, pre-tax bottom line $3.5b, free cash flow 4.8b, ROE
113%. Twitter and Amazon were loss making at IPO. Google
and Facebook were profitable.
 IPO Valuation Comparison
Company LTM Net LTM Sales IPO LTM PE at LTM PS at
Profit ($M) ($M) valuation IPO IPO
($M) (times) (times)
Alibaba 4,033.29 9,356.54 167,960 41.6 18.0
Facebook 652 4038 104,000 159.5 25.8
Twitter -142.557 534.462 24,000 NA 44.9
Google 190.716 2257.952 26,400 138.4 11.7
Amazon -8.484 30.976 438 NA 14.1
CASE STUDY – ALIBABA

Company IPO PRICE ($) First day First day gain

closing price
($)
Amazon 18 23.52 30.7%
Facebook 38 38.23 0.6%
Google 85 100.34 18.0%
Alibaba 68 93.89 38.1%
Visa 44 56.5 28.4%
Twitter 26 44.9 72.7%
 Alibaba’s pricing at 18x P/S appears in the mid range on peer
comparison but compares favourably on P/E comparison. Alibaba
was hugely profitable and the largest e-com, payment gateway and
cloud computing company all rolled into one.
CASE STUDY – ALIBABA

 In comparison with Facebook, the pricing of Alibaba was attractive.

Facebook was almost flat on first day and lost 50% in the next 12
months to bottom out at $19. Clearly it was overpriced and hyped up.
Its Offer P/E at 159x was even higher than that of Google (138x).
Google was a hugely successful retail issue.
 Due to the first day glitches Facebook faced on NASDAQ, both
Alibaba and Twitter opted to list on NYSE.
 Alibaba raised its final offering price only by only 6% thereby
registering a 38% first day gain. Twitter had the highest among its
peers at 72%.
 Alibaba also ensured that most of the issue allocations went to bulk
investors and securities firms which therefore did not bring selling
pressure. Facebook issue mostly landed with retail resellers and small
investors. Since the first day trading was disrupted, it shook their
confidence and the company never recovered from it.