For foreign bonds, the underwriting institutions are those that handle bond issues
in the respective countries in which such bonds are issued. For Eurobonds, a
number of financial institutions in the United States, Western Europe, and Japan
form international underwriting syndicates. The underwriting costs for Eurobonds
are comparable to those for bond flotation in the U.S. domestic market. Although U.S. institutions once dominated the Eurobond scene, economic and financial
strengths exhibited by some Western European (especially German) financial
firms have led to an erosion in that dominance. Since 1986, a number of
European firms have shared with U.S. firms the top positions in terms of acting as
lead underwriters of Eurobond issues. However, U.S. investment banks continue
to dominate most other international security issuance markets—such as international
equity, medium-term note, syndicated loan, and commercial paper markets.
U.S. corporations account for well over half of the worldwide securities
issues made each year.
To raise funds through international bond issues, many MNCs establish their
own financial subsidiaries. Many U.S.-based MNCs, for example, have created
subsidiaries in the United States and Western Europe, especially in Luxembourg.
Such subsidiaries can be used to raise large amounts of funds in “one move,” the
funds being redistributed wherever MNCs need them. (Special tax rules applicable
to such subsidiaries also make them desirable to MNCs.)
Changing the Structure of Debt
As will be more fully explained later, MNCs can use hedging strategies to change the
structure/characteristics of their long-term assets and liabilities. For instance, multinationals
can use interest rate swaps to obtain a desired stream of interest payments
(for example, fixed rate) in exchange for another (for example, floating rate). With
currency swaps, they can exchange an asset/liability denominated in one currency
(for example, the U.S. dollar) for another (for example, the British pound). The use
of these tools allows MNCs to gain access to a broader set of markets, currencies,
and maturities, thus leading to both cost savings and a means of restructuring the
existing assets/liabilities. There has been significant growth in such use during the
last few years, and this trend is expected to continue.
EQUITY CAPITAL
Here we look at how multinational companies can raise equity capital abroad.
They can sell their shares in international capital markets, or they can use joint
ventures, which the host country sometimes requires.
Equity Issues and Markets
One means of raising equity funds for MNCs is to have the parent’s stock distributed
internationally and owned by stockholders of different nationalities. Despite
some advancements made in recent years that have allowed numerous MNCs to
simultaneously list their respective stocks on a number of exchanges, the world’s
equity markets continue to be dominated by distinct national stock exchanges
(such as the New York, London, and Tokyo exchanges). At the end of 2006, for
example, a rather small portion of each of the world’s major stock exchanges consisted
of “foreign company” listings. Many commentators agree that most MNCs
would benefit enormously from an international stock market that had uniform
rules and regulations governing the major stock exchanges. Unfortunately, it will
likely be many years before such a market becomes a reality.
Even with the full financial integration of the European Union, some European
stock exchanges continue to compete with each other. Others have called for
more cooperation in forming a single market capable of competing with the New York and Tokyo exchanges. As noted above, from the multinationals’ perspective,
the most desirable outcome would be to have uniform international rules
and regulations with respect to all the major national stock exchanges. Such uniformity
would allow MNCs unrestricted access to an international equity market
paralleling the international currency and bond markets.
Joint Ventures
Earlier, we discussed the basic aspects of foreign ownership of international operations.
Worth emphasizing here is that certain laws and regulations enacted by a
number of host countries require MNCs to maintain less than 50 percent ownership
in their subsidiaries in those countries. For a U.S.-based MNC, for example,
establishing foreign subsidiaries in the form of joint ventures means that a certain
portion of the firm’s total international equity stock is (indirectly) held by foreign
owners.
In establishing a foreign subsidiary, an MNC may wish to use as little equity
and as much debt as possible, with the debt coming from local sources in the host
country or the MNC itself. Each of these actions can be supported: The use of
local debt can be a good protective measure to lessen the potential impacts of
political risk. Because local sources are involved in the capital structure of a subsidiary,
there may be fewer threats from local authorities in the event of changes
in government or the imposing of new regulations on foreign business.
In support of the other action—having more MNC-based debt in a subsidiary’s
capital structure—many host governments are less restrictive toward
intra-MNC interest payments than toward intra-MNC dividend remittances. The
parent firm, therefore, may be in a better position if it has more MNC-based debt
than equity in the capital structure of its subsidiaries.