FINANCINGININTERNATIONALMARKETS.pptVIP

Eurobonds with Currency Options Attached Attached to a Eurobond issue, a currency option is securitized as a tailor-made listed warrant. ? Advantages over standard currency options For Buyers: - Loophole: In some countries, rules prevent retail and institutional investors from buying currency options per se. - Smaller denominations or contract sizes - Longer exercise periods. For Issuers: - Adding a securitized option reduces the cost of the borrowing. Disadvantage for the issuer: It creates an exposure for itself. The issuer may choose to hedge this exposure. Example: Bioneth Engineering is a firm based in Portugal. Situation: - Bioneth has GBP 100 million of short-term debt. - Refinance the GBP debt with a straight 7-year 8% Euro-GBP bond. - Market competitive pressures reduce commissions paid to 1?%. An investment bank approaches Bioneth and offers: A similar straight bond, but with a 3-year warrants attached giving entitlement to an American GBP-put (EUR call) option, with the terms: ? Terms of the bond. Amount: GBP 100 million. Maturity: 7 years. Issue price: 100% Denominations: GBP 1,000 Interest: 8% p.a. payable annually in arreas. Early redemption: None. Redemption price: 100% Issuance commissions: 1?% Listing: London Cost of funds (including commissions): 8.34% ? Terms of the currency warrants Exercise price: 1.50 EUR/GBP (.6667 GBP/EUR) Exercise period: At any time. Current exchange rate: 1.60 EUR/GBP (.6250 GBP/EUR) Structure: Each bond has a warrant giving the right to receive the difference between: (1) the GBP equivalent of EUR 1,600 at X=1.50 EUR/GBP, and (2) the GBP equivalent of EUR 1,600 at St. Warrant price: EUR 0.04935 per GBP. At St, GBP 0.0308 or GBP 30.80 per bond (3.08%). Issue price: 100% + 3.08% = 103.08% Premium of X/S: .6667/.6250 = 1.0667 or 6.67% Note: The warrant is the standard put. It will be exercised only when: (X-St) 0. ? Evaluation ? At expiration, two scenarios for GBP put: if St+3