Lecture 1&2 Debt Markets Flashcards
Role of debt capital markets
- match borrowers to lenders and tailor risks so that borrowers do not overpay and investors receive fair compensation
Tailoring Risk (6)
- Credit Risk
- Maturity
- Liquidity
- Legal
- Interest Rate
- Currency
Types of Debt (4)
- Syndicated Bank Loans
- Commercial Paper (ST, ECP, USCP less than 1 yr, Asset Backed)
- Bonds (LT, FRN, Fixed, ILBs) (around 60bn)
- Securitisation
- CP, Bonds, group of assets put into investment vehicles
- CMBS
- RMBS
- CLO
- Derivs
- Conduit, pools of assets
Bank Loan - 2 forms of bank lending
- Bilateral (250bn pa; 2 counterparties, bank & borrower)
- 1 bank
- individual docs
- based on relationships
- bank knows the company and minimises default risk by knowing the company and its mgmt
- Can lead to concentration in credit portfolio of the bank
Syndication
- Multi bank transaction
- Common documents, common terms
- Agent (single agent represents all)
- Security trustee
- Secured/unsecured
- typically larger transactions - project finance, infratructure, large corporates, leverage finance LBOs, MBOs
- underwritten
- best effort
- club
EXAM: Name the 4 ways to borrow
consider diagram as well
- Bilateral Loans
- Syndicated Loans
- One Name
- Securitisation
Name 3 types of risk that banks take on
- Credit risk
- Interest rate risk
- Liquidity risk
- liquidity: funded short, lend long; if people who lend do not roll over 90 day paper -> liq risk.
- lending to failed entity
Liquidity Risk
- Institutional (name crisis - bank specific, specific issue leads to withfrawal of deposits
- Systemic (customers worried about all banks - loss of confidence in banks more generally)
- Regional (offshore investors worried about Aus banks)
- COncentration risk (large cash outflows on a given day or over a short period; reliance on funding from a single party
- Credit Risk (c/p default)
Banks - characteristics
- highly regulated to protect depositors
- highly geared and therefore risky
Disintermediation
- banks act as dealer and arranger
- banks can originate, sales and distribution, provide research, act as structure
- originate -> warehouse -> distribute
- issuer pays fees to banks, banks may pass some of this on, their choice
- investor takes the issuer’s liquidity risk when holding the note
Role of Syndicate
- arbitrate between originator and sales
- arbitrate between sales offices
- estimate where deal will price
- run the book
Factors to consider when banks choose intermediation or disintermediation
- Risk appetite: if large, bank takes on direct exposure. If low and if higher regulation, then use intermediation
- Capital efficiency (measured by analysts, board, regulator)
- Revenue measures - lending dominates
- Capital constrained - DCM dominates
- evolves depending on business cycle
Customer Funding Index
Term Funding Index
Stable Funding Index
CFI: Customer FUnding + Core Funded Assets
TFI: Wholesale funding (remaining term to maturity > 1 year) + core funded assets
SFI: TFI + CFI
Long Term Wholesale Funding
- pre crisis averaged 0.15% to 0.20%
- Following collapse of Lehman Bros term funding increased to over 1.70%
- Weighted average cost of term wholesale funding expected to continue to rise even though marginal cost is coming down (due to maturities)
- Overall costs to increase with rising average cost of term wholesale and higher retail deposit costs (stable but more costly)
Role of Exchange
- Listing
- Trading (venue for trading)
- Clearing House
- Settlement (Austraclear, Euroclear)
Difference between LIBOR and BBSW
LIBOR: London Interbank OFFERED rate, ie it is and offer
BBSW: mid point
EXAM: Why would we list a bond on the exchange?
- To comply with section 128f of the income tax assessment act
- Listing enables you to access data as an investor - especially Eurobond
How do Banks fund themselves?
How do Corporates fund themselves?
Banks:
- Bonds - Issuance
- Corporate - Institutional Bank Deposits
- Retail Deposits
- Equity (8%) - core equity from investors
Corporates:
- Loans from relationship banks
- Bond issuance
- CP - working capital
- Equity - core equity from investors
Debt vs Equity
Debt: Non permanent, promise to repay borrowed money plus interest
Equity: Permanent
Bank debt
- revolving facility
- loan provided by borrower’s bank which pays interest
- Key: flexibility.
- revolving facility: borrow and repay without penalty and redraw at a later time.
Syndicated bank debt / bank loan
- more than one bank lending under common terms and common agreement.
- agent administers the loan and often acts as security trustee
- larger loans
- may be securitised or non securitised
Debt Capital Markets
- market for dis intermediated debt instruments (ie instruments rather than bank loans)
- includes debt for single name credits as well as securitised assets.
Tendency for banks…
tendency to lend short term (in line with deposit base) and lend long term
Roles of financial intermediaries in disintermediation
- issuers
- investors
- agent / lead manager
- issuing and paying agent
- dealer
function roles in process of originating and selling a debt capital market instrument
- origination
- syndicate
- research
- structuring
- sales and distribution
- trading