abhishreshthaa
Abhijeet S
Financing of MNCs in local or international market
Project financing may be defined as financing of an economic unit, legally independent, created with a view to setting up of a big project, which is commercially profitable and financially viable.
Project is considered as a distinct legal entity and is financed, to a marked extent, by debt (65 to 75 percent). Therefore the risk to be borne is substantial.
There are two major methods of financing international projects:
1. Financing with total risk borne by lenders where only the future cashflows ensure the reimbursement of the loan. This method of financing was used in petroleum and gas industry in the USA and Canada. Due to increased level of risks, this method of project financing is generally not preferred.
2. In another type of financing, both the lender and the promoter share the risk. The problem sometimes encountered in this method is to decide the proportion in which the risk is to be shared between two parties.
Domestic v/s Offshore markets
Financial assets and liabilities denominated in a particular currency - say the Swiss Franc - are traded are primarily in the national financial markets of that country. These financial markets are known as ‘Domestic Markets’.
In case of many convertible currencies they are traded in the financial markets outside the country of that currency. These financial markets are known as ‘Offshore Markets’.
While it is true that neither both markets will offer both the financing options nor any entity can access all segments of a particular market, it is true generally that a given entity has an access to both the segments of the markets for placing as well as raising funds.
There are theories by experts that suggest that there are no two types of financial markets (viz. Domestic and offshore markets) but everything is a part of single ‘Global Financial Market’.
Similarity
Experts suggest that ‘arbitrage’ will ensure that both these markets will be closely linked together in terms of costs of funding and returns on assets.
Differences
Both of these markets significantly differ on the ‘Regulatory dimension’. Major segments of the domestic markets are subject to strict supervision by the relevant authorities such as SEC in US, Ministry of Finance in Japan and the Swiss National Bank in Switzerland. These authorities regulate foreign (non-resident) entities’ access to the public capital markets in their countries by laying down eligibility criteria, disclosure & accounting norms and registration & rating requirements (similarly for domestic banks, reserve requirements and deposit insurance).
The offshore markets on the other hand have minimal regulation and often no registration.
Finally it must be noted that though the nature of regulation continues to distinguish Domestic from the offshore markets, there are segments like Private Placements, Unlisted Bonds, Bank loans etc. in domestic markets where regulation tends to be the least.
Project financing may be defined as financing of an economic unit, legally independent, created with a view to setting up of a big project, which is commercially profitable and financially viable.
Project is considered as a distinct legal entity and is financed, to a marked extent, by debt (65 to 75 percent). Therefore the risk to be borne is substantial.
There are two major methods of financing international projects:
1. Financing with total risk borne by lenders where only the future cashflows ensure the reimbursement of the loan. This method of financing was used in petroleum and gas industry in the USA and Canada. Due to increased level of risks, this method of project financing is generally not preferred.
2. In another type of financing, both the lender and the promoter share the risk. The problem sometimes encountered in this method is to decide the proportion in which the risk is to be shared between two parties.
Domestic v/s Offshore markets
Financial assets and liabilities denominated in a particular currency - say the Swiss Franc - are traded are primarily in the national financial markets of that country. These financial markets are known as ‘Domestic Markets’.
In case of many convertible currencies they are traded in the financial markets outside the country of that currency. These financial markets are known as ‘Offshore Markets’.
While it is true that neither both markets will offer both the financing options nor any entity can access all segments of a particular market, it is true generally that a given entity has an access to both the segments of the markets for placing as well as raising funds.
There are theories by experts that suggest that there are no two types of financial markets (viz. Domestic and offshore markets) but everything is a part of single ‘Global Financial Market’.
Similarity
Experts suggest that ‘arbitrage’ will ensure that both these markets will be closely linked together in terms of costs of funding and returns on assets.
Differences
Both of these markets significantly differ on the ‘Regulatory dimension’. Major segments of the domestic markets are subject to strict supervision by the relevant authorities such as SEC in US, Ministry of Finance in Japan and the Swiss National Bank in Switzerland. These authorities regulate foreign (non-resident) entities’ access to the public capital markets in their countries by laying down eligibility criteria, disclosure & accounting norms and registration & rating requirements (similarly for domestic banks, reserve requirements and deposit insurance).
The offshore markets on the other hand have minimal regulation and often no registration.
Finally it must be noted that though the nature of regulation continues to distinguish Domestic from the offshore markets, there are segments like Private Placements, Unlisted Bonds, Bank loans etc. in domestic markets where regulation tends to be the least.