A number of studies conclude that certain factors unique to each host country can
cause differences in capital structures. These factors include legal, tax, political,
social, and financial aspects, as well as the overall relationship between the public
and private sectors. Owing to these factors, differences have been found not only
among MNCs based in various countries but also among the foreign subsidiaries
of an MNC. However, because no one capital structure is ideal for all MNCs, each
multinational has to consider a set of global and domestic factors when deciding on the appropriate capital structure for both the overall corporation and its
subsidiaries. Understanding country factors can help financial managers make
better-informed decisions. As the Global Focus box discusses, one way to improve
one’s ability to understand how business is conducted in other countries is to take an
overseas assignment.
LONG-TERM DEBT
As noted earlier, multinational companies have access to a variety of international
financial instruments. Here we will discuss international bonds, the role of
international financial institutions in underwriting such instruments, and the use
of various techniques by MNCs to change the structure of their long-term debt.
International Bonds
In general, an international bond is one that is initially sold outside the country of
the borrower and is often distributed in several countries. When a bond is issued
by a foreign corporation or government and is denominated in the investor’s
home currency and sold in the investor’s home market, it is called a foreign bond.
For example, an MNC based in Germany might float a foreign bond issue in the
British capital market underwritten by a British syndicate and denominated in
British pounds. When an international bond is sold to investors in countries with
currencies other than the currency in which the bond is denominated, it is called
a Eurobond. Thus, an MNC based in the United States might float a Eurobond in
several European capital markets, underwritten by an international syndicate and
denominated in U.S. dollars.
The U.S. dollar and the euro are the most frequently used currencies for
Eurobond issues, with the euro rapidly increasing in popularity relative to the
U.S. dollar. In the foreign bond category, the U.S. dollar and the euro are major
choices. Low interest rates, the general stability of the currency, and the overall
efficiency of the European Union’s capital markets are among the primary reasons
for the growing popularity of the euro.
Eurobonds are much more popular than foreign bonds. These instruments
are heavily used, especially in relation to Eurocurrency loans in recent years, by
major market participants, including U.S. corporations. The so-called equitylinked
Eurobonds (that is, Eurobonds convertible to equity), especially those
offered by a number of U.S. firms, have found strong demand among Euromarket
participants. It is expected that more of these innovative types of instruments will
emerge on the international scene in the coming years.
A final point concerns the levels of interest rates in international markets. In
the case of foreign bonds, interest rates are usually directly correlated with the
domestic rates prevailing in the respective countries. For Eurobonds, several
interest rates may be influential. For instance, for a Eurodollar bond, the interest
rate will reflect several different rates, most notably the U.S. long-term rate, the
Eurodollar rate, and long-term rates in other countries.