Raising capital erases global barriers
Boston — ``International capital markets are one,'' says Masao Fujioka, president of the Asian Development Bank (ADB). Last month Mr. Fujioka proved this to some degree. He flew to New York for a public offering by the ADB of a 35 billion yen-denominated bond issue in the United States capital markets.
The Japanese executive was pleased. The issue, equivalent to $144 million at that time, represented the first Japanese yen bonds sold in New York. The ADB, an international bank that lends money for development projects in its Asian members, raised more funds than it had originally planned.
``There is a strong demand here,'' Mr. Fujioka notes. A number of institutional investors, hoping to gain from an appreciation of the yen, snapped up the 6.5 percent bonds from the underwriters. Already they have -- at least on paper -- benefited from the recent jump in the value of the Japanese currency.
For the ADB, the borrowed money was no more expensive than it would have been if obtained in Tokyo.
Indeed, nowadays billions of US dollars, Japanese yen, West German marks, British pounds, and other currencies slosh around the world, looking for good investment opportunities.
Last year, the international capital markets raised $228 billion, according to the Organization for Economic Cooperation and Development in Paris. This year, through August, total borrowing on these markets already reached $177 billion, well above the level at the same time last year.
This is big money. It's important.
Those billions finance multitudinous projects -- new plant and equipment needed by companies, corporate takeovers, development programs in poorer countries, and sometimes highways, power plants, or other facilities backed by governments of industrial nations. The World Bank alone borrows more than $10 billion a year.
Corporations shop around the world for the cheapest or most advantageous source of money. Usually their most important consideration is cost: the interest rate. But there are other factors. A company might want to increase its exposure in another currency, hoping to profit from exchange-rate changes.
For instance, Philip Morris's $6 billion takeover of General Foods is being financed by a package involving loans from 17 domestic banks and 29 international institutions. The foreign banks are lending in dollars. With the massive US current-account deficit, foreigners are eager to find good investments for surplus dollars. Philip Morris found that foreign banks were freer to lend for a takeover than American banks.
International flows of money also have an economic impact. For instance, one reason for the strength of the yen in relation to the dollar in recent times, despite the massive trade gap between the US and Japan, was the purchase of US Treasury securities, corporate bonds, and other investments by Japanese pension funds and insurance companies. Money was pouring out of Japan at an annualized rate of $64.5 billion in the first seven months of this year.
On Sept. 11, however, the Ministry of Finance pointed out to these financial institutions that they were taking a ``currency risk.'' In other words, a stronger yen could cause them losses.
This ``administrative guidance,'' plus the warning of the Group of Five industrial nations after its Sept. 22 meeting in New York about the dollar being too strong, sent the yen climbing in value.
Reagan administration officials hope the weaker dollar and stronger yen will eventually improve the US trade balance with Japan and weaken protectionist pressures in Congress.
Another example: Foreigners bought $30 billion of bonds in the US market in the first half of this year, including Treasury bonds. Interest rates would have been higher without that money.
Not everyone is happy with the internationalization of capital markets. ``It has got out of hand,'' Helmut Schmidt, former chancellor of West Germany, complained last week.
Fifteen years or so ago, Mr. Schmidt recalled, money moving across borders was usually invested for three months or longer. Now, with the vast improvement in communications technology, some investments are made of only overnight money.
Schmidt, in this country for a conference sponsored by Putnam International Advisors, a money management group, spoke of investors with computer terminals and video screens on their desks speculating over shifts in interest rates or bond prices in the next 30 minutes in New York or London.
Yet, he continued, there is no integrated central bank system or regulatory authority to supervise these capital markets. ``National authorities slept on their ears when they allowed this,'' he said.
Schmidt, a member of Parliament in Germany, sees no desire on the part of governments to go back to capital controls. But he wonders if the lack of discipline in these markets could lead to a division of the world economy into compartments -- a dollar area, an ECU (European currency unit) area, and, perhaps, a yen area. He is not so sure about the latter -- ``given the fact no one wants to line up with Japan.''
The participants in the international capital markets, however, regard its rapid development as something like gourmet chocolate -- highly desirable. To them it means investors (say, a pension fund or insurance company) can spread risks across borders, thereby possibly reducing those risks. And borrowers have access to a world market -- not just a national one -- for money.
``You have more alternatives,'' notes Robert D. Hormats, a vice-president of Goldman, Sachs & Co., speaking in his 23rd-floor office on Manhattan's Broad Street. ``Sitting here I can buy virtually any stock in the world in two minutes. If I want to buy a bond denominated in deutsche marks, I can do it. American borrowers can borrow as freely in London as they do here. You can borrow virtually anywhere in any currency today.''
Brokerages, investment banks, and commercial banks tie the system together around the globe.
Moreover, that internationalization of the markets is progressing. Curtis R. Welling, vice-president of First Boston Corporation, which led the underwriting group bringing the Asian Development Bank bond issue to market, figures that over time a bigger market will develop in New York for capital issues in currencies other than the dollar.
Up to now, many foreign bond issues (issues by foreign entities in the currency of the country where the bonds are sold; in the ADB case, in dollars) have been placed in New York. But international bond issues (issued by foreign entities in a currency other than that of the country where it is sold) have usually been underwritten in London, Tokyo, or Hong Kong. Only seven have been sold in the US.
London has prospered as a capital market because it is less regulated than most other such markets. Corporations or others issuing bonds have to disclose less financial information than they would if they sought the money in New York. Further, Londoners have over the years acquired enormous financial expertise.
Now other governments are deregulating their capital markets, thereby encouraging greater international flows of money. The United States no longer withholds taxes on foreign owners of US bonds. Most continental European markets have reduced various capital controls. The Japanese have also trimmed their regulations. But foreigners wanting to borrow money in yen -- the so-called samurai market -- must still line up. The Japanese Ministry of Finance regulates the volume of such lending by establishing a cue for borrowers.
New York remains the largest capital market, followed by London and Tokyo.
Another development is that the capital markets are taking some direct loan business away from commercial banks. Lenders nowadays prefer to buy securities that can be relatively easily sold. They are worried by the volatility of interest rates on world money markets.
Investment bankers may still tend to wear pin-stripe suits. But they are more flexible in their techniques for raising money. When the Rockefeller family sold a chunk of Rockefeller Center for $1.1 billion, Goldman, Sachs sought buyers in the US, Europe, and Japan.
``Virtually any major issue today is bought by buyers around the world,'' notes Mr. Hormats.