Legal Aspects of International Finance

Introduction

International finance binds together domestic and global financial transactions in an efficient and competitive way. (Gianaris, 2001). International trade and finance, which promote specialization, productivity, and living standards for all countries, is one of the biggest industries today, and markets for the exchanges of currencies must exist to facilitate such international transactions. Capital markets are markets where people, companies, and governments with more funds than they need, transfer those funds to people, companies, or governments who have a shortage of funds. Stock and bond markets are two major capital markets.

Bonds are important in international finance. Stock is the type of equity security with which most people are familiar. When investors (savers) buy stock, they become owners of a "share" of a company's assets and earnings. In other words, the companies borrowed directly by issuing securities to investors in the capital markets. By contrast, indirect finance involves a financial intermediary between the borrower and the saver. Emerging market bonds is a Security markets in countries such as Mexico and Malaysia that are still developing their industrial base. Investments in emerging markets entail substantial risk with the potential for above-average returns.

The direct or indirect benefits of international trade and finance come primarily from the enlargement of the market and the specialization and more efficient employment of productive resources, as well as technological advances. International transactions involve covenants agreed upon by different countries. The discussion of the paper is about the covenants involved.

Debt Covenant

Debt covenants, also called banking covenants or financial covenants, are agreements between a company and its creditors that the company should operate within certain limits. Debt covenants are agreed as a condition of borrowing. They may be changed if debt is restructured.(www.moneyterms.co.uk). One of the importances of debt covenants is that it can impose heavy obligation. Companies are careful in dealing with the covenant; breach of a debt covenant allows creditors to demand immediate repayment. A breach of covenants usually leads to a renegotiation of the terms of debt. In order to prevent companies from meeting the requirements by adjusting their accounting practices rather than by genuinely maintaining the required level of financial health, debt covenants not only specify the numbers that should be met, but also exactly how they should be calculated for the purposes of the debt covenant. This means that if a company breaches, or is in danger of breaching its debt covenants, not only does this indicate that the company is not financially strong, but also that the problems are likely to become worse as lenders react.

The following are reasons why covenants are important : (Noonan, 2005)

Covenant protect bondholders against a diminution in value of their investment through:

Credit deterioration

Loss of “equity cushion”

Loss of control over assets

Loss of seniority position

Covenants increase the chance of capital gains for bondholders because they force the company to

Deleverage (or, more accurately, limit the company's ability to releverage)

Reinvest earnings

The typical restricted payments covenant requires the company to retain 50% of net income in the business and allows 50% to be dividended out to to stockholders

As a result, covenants lead to credit improvement which increases chance that bonds will trade above par

High Yield Debt Covenant

Optional Redemption - Most issues of tax-exempt bonds have “call protection” wherein the bonds may not be called (i.e. redeemed) by the issuer for a specified period after the date of issue. A typical call protection period on a 30 year bond is the first 10 years after the issue date. After the initial period, many tax exempt bonds contain optional redemption provisions which permit the issuer to call the bonds prior to maturity. These optional redemption provisions usually contain call premiums which decrease over time. For example, a bond issued in 1996 with a 30 year maturity may be callable at a price of (i) 102 (i.e. par - 100, plus 2 percent of the principal amount called ) in 2006, (ii) 101 percent in 2007, and (ii) 100 percent in 2008 and thereafter. (Walton, 1996).

Repurchase of Notes at the Option of the Holder upon a Change of control - defines the bondholder's right to “put” or force the company to repurchase, the debt in the event of a change of control, typically at 101% of the principal amount. The indenture will provide that in the event that a Change of Control has occurred, each Holder of Notes will have the right, at the Holder's option, pursuant to a Change of Control Offer by the Company, to require the Company to repurchase all or any part of such Holder's Notes on a date that is not later than 90 days after the occurrence of such Change of Control, at a cash price equal to 101% of the principal amount thereof, together with Liquidate Damages and accrued and unpaid interest. An example is the Alpharma Inc. (1998) In the event of a Change in Control with respect to the company, then the Holder of this Note shall have the right, at the Holder's option, subject to the rights of the holders of Senior Indebtedness, to require the Company to repurchase this Note or any portion thereof which is $1,000 or any integral multiple thereof on a business day (the "Repurchase Date") that is no later than 90 days after the date of such Change in Control, unless otherwise required by applicable law, at a price equal to 100% of principal amount of the Note, plus accrued and unpaid interest to the Repurchase Date.

Limitation on Incurrence of Additional Indebtedness and Disqualified Stock

Except as set forth below in this covenant, the Issuers and the Guarantors will not, and will not permit any of their Subsidiaries to, individually or collectively, directly or indirectly, issue, assume, guaranty, incur, become directly or indirectly liable with respect to (including as result of an Acquisition), or otherwise become responsible for, contingently or otherwise (individually and collectively, to "incur" or, as appropriate, an "incurrence"), any Indebtedness or any Disqualified Capital Stock (including Acquired Indebtedness), except Permitted Indebtedness. Notwithstanding the foregoing, if (i) no Event of Default shall have occurred and be continuing at the time of, or would occur after giving effect on a pro forma basis to, such incurrence of Indebtedness or Disqualified Capital Stock and (ii) on the date of such incurrence (the "Incurrence Date"), the Consolidated Coverage Ratio of Sun International for the Reference Period immediately preceding the Incurrence Date, after giving effect on a pro forma basis to such incurrence of such Indebtedness or Disqualified Capital Stock and, to the extent set forth in the definition of Consolidated Coverage Ratio, the use of proceed thereof, would be at least 2.5 to l (the "Debt Incurrence Ratio"), then the Issuers and the Guarantors, if any, may incur such Indebtedness or Disqualified Capital Stock

http://www.effas-ebc.org/EBC%20Presentations/Last%20Two%20Years/2006%20Oct%20Frankfurt/High%20Yield%20Covenants%20-%20Merrill%20Lynch%20-%20Oct%202005.pdf

Woeping, J. (2007) International Capital Markets & Their Importance http://www.uiowa.edu/ifdebook/ebook2/contents/part3-II.shtml

Globalization

A Financial Approach

Nicholas V. Gianaris

2001

Alpharma Inc - 8-K - For 3/30/98 - EX-4

Filed On 4/10/98 - SEC File 1-08593 - Accession Number 730469-98-2

Kerzner International North America Inc - 8-K - For 7/23/01 - EX-99

Filed On 8/3/01 2:55pm ET - SEC File 1-04748 - Accession Number 914444-1-500042

http://www.secinfo.com/drtZ3.4f8A5.d.htm

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