International finance plays a very important role in financing the cost of capital of projects in the corporate sector.
In the international financial market, the borrower from one country may seek lenders in other countries in the specific currency which need not be of the participant country. In the international financial market, the availability of foreign currency is assured under four main systems:
- Euro currency market;
- Export credit facilities;
- Bond issues; and
- Financial institutions.
(a) Euro currency market— Here funds are made available as loans through syndicated Euro credits/instruments known as Floating Rate Notes FRNs. Interest rates vary every 3 to 6 months based on London—Interbank offered—Rate. Syndicated Euro Currency bank loan has developed into one of the most important instruments for international lending. Syndicated Euro credit is available through instruments viz. Term Loan and Revolving Line facility.
(b) Export Credit Facilities are made available by several countries through an institutional framework in which EXIM Banks play a prominent role. EXIM Bank of India is playing a significant role in financing exports and other offshore deals.
(c) International Bond Market provides facilities to raise long term funds by using different types of instruments. The bond market is generally known as the Euro bond market.
(d) UN Agency financial institutions viz. IMF of the World Bank and its allied agencies, IFC (W), ADB, etc. provide finance in foreign currency.
New International Instruments
Swap is the international finance market instrument for managing funds. The basic concept involved in swaps is the matching of the difference between the spot exchange rate for a currency and the forward rate. The swap rate is the cost of exchanging one currency into another for a specified period of time. The swap will represent an increase in the value of the forward exchange rate (premium of a decreasing discount). There are three main types of swaps (a) interest swap; (b) currency swap; (c) combination of both.
Syndicated Euro Currency Loans
The Eurocurrency market refers to the availability of a particular currency in the international financial market outside the ‘home country’ of that currency. For example, the Eurodollar market refers to the financial market for US dollars in England, France, Germany, Hong Kong, and other financial centers outside the US. The Eurodollar borrowing may be evidenced by the issue of commercial paper in the form of promissory notes, or by subscription to bond/debentures or it may be syndicated loan type.
Main Objectives of Syndication (Borrowers’ point of view)
- Large sums are arranged without delay and at least cost.
- Gets a better introduction to enter into the international loan market without much difficulty.
- Funds are made available easily for meeting the balance of payment deficit and for financing large industrial projects.
- The borrower is allowed to select the length of the rollover period and in choosing different currencies to repay or cancel agreements after a short notice period without penalty.
Lenders’ point of view
- It helps the bank to share large credits with other banks, to finance many borrowers.
- Different size banks can participate.
- It provides more profitability to banks as costs are relatively low.
- A syndicated loan is underwritten by a small group of banks that resell portions of the commitments to other banks.