SECURITIZATION: A FINANCING STRATEGY FOR EMERGING MARKETS FIRMS

With emerging markets now in crisis, companies in developing countries are finding it difficult to obtain financing. Securitization, a transaction structure in which the securities sold to investors are backed by a company's receivables, is one of the few vehicles with at least the potential to provide financing at economic rates in the current environment of uncertainty.
Unlike U.S. securitization issues, emerging markets transactions often use a structure known as "future flows" securitization, in which the securities are backed by receivables that are not expected to be generated until after issuance. This article begins by describing how the process of future flows securitization carves out securities with levels of political risk acceptable to foreign capital market investors. Then it traces the history of emerging markets securitization from its origins in Latin America to its more recent uses during the Asian crisis. Securitization helped bring foreign investors back to Latin America after its debt crisis of the early 1980s. And while the Asian crisis has sharply reduced new issuance for all kinds of emerging market financings, the volume of securitization issues appears to have declined less precipitously than other types of transactions geared to foreign investors. Moreover, investment bankers are now hard at work planning new securitization issues for companies in both Latin America and Asia.
In exploring the longer-term effects of securitization on both domestic issuers and their economies, the author suggests that securitization could play a pivotal role in restoring emerging markets companies' access to global financial markets. Indeed, with a few exceptions such as Malaysia, most emerging markets are now responding to the crisis by taking measures to protect investors, such as requiring greater financial transparency and dispelling legal uncertainties that have discouraged securitization in particular and overseas investment more generally.     

Yankee Bonds and Cross-Border Private Placements

With credit spreads and U.S. Treasury yields near historical lows and the recent relaxation of U.S. regulatory reporting requirements, the U.S. bond markets are more and more frequently the markets of choice for international issuers. Total cross-border U.S. bond issuance is expected to top $200 billion in 1997, easily surpassing previous issuance levels.
Overseas issuers have three primary forms through which they can participate in the U.S. long-term debt markets: publicly traded, SEC registered bonds (commonly known as "Yankee" bonds); traditional private placements; and underwritten Rule 144A private placements. Each of these three financing methods has distinct benefits and limitations that should be thoroughly evaluated in light of the specific objectives of the issuer. Yankee bonds are typically the most cost-efficient vehicle for large, investment-grade issuers. The fastest growing segment is the rule 144A market, which accounted for 38% (by number, not dollar volume) of all U.S. cross-border debt transactions in 1996. The Rule 144A structure is often used for complex structures requiring heavy rating-agency involvement, such as future financial flow transactions and project financings. The 144A market has also become a particular favorite with international issuers because of its less formal disclosure requirements and streamlined execution process. The private placement market, which accounted for 24% of cross-border transactions in 1996, continues to be the dominant choice of smaller issuers, companies with complicated "stories," and firms that do not wish to submit to regular scrutiny by rating agencies. This article provides a detailed analysis of each type of bond issuance and the related issues facing a financial officer in trying to determine the most appropriate source of long-term debt.     

Do investors value frequent issuers in securitization?

We assess the value of frequent issuers to investors in securitization markets by examining the initial yield spread of 6132 European mortgage-backed securities (MBS), covering a 20-year period between 1999 and 2018. We find that frequent issuers have certification value, and it increases as the credit cycle approaches its peak, as lending standards loosen, and information asymmetries in securitization markets increase. Investors value frequent issuers more favourably on riskier, difficult to evaluate MBS. We find that after the great financial crisis (GFC), investors began to attribute more value to frequent issuers, regardless of MBS credit quality. We also find that in the pre-crisis period, investors required higher yields to compensate for perceived rating shopping, which is not observed after the GFC. Finally, we show that investors expect higher yields on deals closed by subsidiaries of foreign banks.

     

Where's the greenium?

In this study, we investigate whether investors are willing to trade off wealth for societal benefits. We take advantage of unique institutional features of the municipal securities market to provide insight into this question. Since 2013, states and other governmental entities have issued over $23 billion of green bonds to fund eco-friendly projects. Comparing green securities to nearly identical securities issued for non-green purposes by the same issuers on the same day, we observe economically identical pricing for green and non-green issues. In contrast to a number of recent theoretical and experimental studies, we find that in real market settings investors appear entirely unwilling to forgo wealth to invest in environmentally sustainable projects. When risk and payoffs are held constant and are known to investors ex-ante, investors view green and non-green securities by the same issuer as almost exact substitutes. Thus, the greenium is essentially zero.     

YANKEE BONDS AND CROSS-BORDER PRIVATE PLACEMENTS: AN UPDATE

With U.S. Treasury yields near historical lows and the recent relaxation of U.S. regulatory reporting requirements, the U.S. bond markets are more and more frequently the markets of choice for international issuers. Total crossborder U.S. bond issuance is expected to top $350 billion in 2000, easily surpassing previous issuance levels.
Overseas issuers have three primary forms through which they can participate in the U.S. long-term debt markets: publicly traded, SEC-registered bonds (commonly known as "Yankee" bonds); traditional private placements; and underwritten Rule 144A private placements. Each of these three financing methods has distinct benefits and limitations that should be thoroughly evaluated in light of the specific objectives of the issuer. Yankee bonds are typically the most cost efficient vehicle for large, investment grade issuers, and they are expected to account for over 75% of the $350 billion market in 2000. Second in importance is the rule 144A market, which is typically used for complex structures requiring heavy rating-agency involvement, such as future financial flow transactions and project financings. The 144A market has also become a particular favorite with international issuers because of its less formal disclosure requirements and streamlined execution process. The private placement market continues to be the dominant choice of smaller issuers, companies with complicated "stories," and firms that do not wish to submit to regular scrutiny by rating agencies. This article provides a detailed analysis of each type of bond issuance and the issues facing a financial officer in trying to determine the most appropriate source of long-term debt.     

Barriers to international investing and market segmentation: Evidence from Indian GDR market

In this paper we evaluate market segmentation and its effect on the pricing of cross-listed securities using Indian Global Depositary Receipts (GDRs). When international capital markets are segmented, cross-listed securities may trade at different prices. We test this market segmentation hypothesis using a theoretical and empirical model developed along the lines of Hietala [Hietala, P.T., 1989, Asset pricing in partially segmented markets: Evidence from the Finnish market, Journal of Finance 44, 697–718]) and Foerster and Karolyi [Foerster, S.R., Karolyi, A.G., 1999, The effects of market segmentation and investor recognition on asset prices: Evidence from foreign stocks listing in the United States, Journal of Finance 54, 981–1013; Foerster, S.R., Karolyi, A.G., 1999, The long-run performance of global equity offerings, Working Paper, Ohio State University]. Our model looks at a specific type of market segmentation in India, where capital flow barriers are such that domestic investors are allowed to invest only in domestic securities, while the foreign investors can invest in dollar-denominated Indian GDRs as well as other foreign securities. Tests on these GDRs indicate that foreign investors, who hold these depositary receipts, estimate the expected returns at a lower level than the domestic investors do. This leads to the GDRs being priced at a premium over the exchange rate adjusted prices of the underlying Indian securities. GDR index returns are affected by both domestic and international factors, while the underlying Indian securities are affected only by domestic variables.     

Transparency and Tax Evasion: Evidence from the Foreign Account Tax Compliance Act (FATCA)

We examine how U.S. individuals respond to regulation intended to reduce offshore tax evasion. The Foreign Account Tax Compliance Act (FATCA) requires foreign financial institutions to report information to the U.S. government regarding U.S. account holders. We first document an average $7.8 billion to $15.3 billion decrease in equity foreign portfolio investment to the United States from tax-haven countries after FATCA implementation, consistent with a decrease in “round-tripping” investments attributable to U.S. investors’ offshore tax evasion. When testing total worldwide investment out of financial accounts in tax havens post-FATCA, we find an average decline of $56.6 billion to $78.0 billion. We next provide evidence of other important consequences of this regulation, including increased expatriations of U.S. citizens and greater investment in alternative assets not subject to FATCA reporting, such as residential real estate and artwork. Our study contributes to both the academic literature and policy analysis on regulation, tax evasion, and crime.     

PRICING NIKKEI PUT WARRANTS: SOME EMPIRICAL EVIDENCE

The newly created Nikkei put warrants represent a recent innovation in security development. These privately issued puts enable investors to hedge or speculate on price movements in the Japanese market. Understanding the pricing behavior of these new securities provides U.S. investors and issuers with valuable information to assess potential benefits and costs. In this research two alternative pricing models are used to explain the observed prices of several privately issued Nikkei put warrants. While results from the two models indicate some pricing biases, pricing errors are very small overall.     

EXPRESS LANE OR TOLLBOOTH IN THE DESERT? THE SEC'S FRAMEWORK FOR SECURITY ISSUANCE

U.S. companies that need capital may choose between selling securities in the private and public markets. These venues differ in terms of direct issuance costs, the required information disclosed, the liability incurred, and the mechanics of the capital-raising process itself. During the last two decades, the Securities and Exchange Commission (SEC) has deregulated private offerings by broadening their investor base and increasing secondary market liquidity. At the same time, SEC policy has bifurcated the offering process in the public market into two distinct segments based largely on company size and seasoning. Large public issuers have seen a gradual deregulation and acceleration of their capitalraising processes. Important changes for issuers include allowing them to incorporate information into registration statements by reference to Exchange Act reports, to use shelf registration to speed up offers, and to place securities offshore with less regulatory uncertainty. Though small issuers enjoy some of the benefits of these changes, deregulation of their offerings has been somewhat less pronounced. In a Commission report and a subsequent concept release, the SEC indicates it may restructure and unify these three disparate strands of capital raising through an innovative schema of registering companies rather than securities.     

Financial reporting and information asymmetry: an empirical analysis of the SEC's information-supplying exemption for foreign companies

This paper examines empirically the effects of domicile and SEC registration and reporting requirements on information asymmetry. We compare the adverse-selection component of the relative bid–ask spread (our measure of information asymmetry) for three samples of Nasdaq NMS companies that trade in different home markets and are subject to different standards of disclosure: registered U.S. companies, registered non-Canadian foreign companies, and unregistered non-Canadian foreign companies covered by the information-supplying exemption of the Securities and Exchange Act of 1934. We find that the adverse-selection component is not significantly larger for the two foreign samples, and it is not reliably different for the registered and unregistered foreign samples. Therefore, we are unable to document that less stringent SEC registration and reporting requirements for foreign companies are associated with greater information asymmetry among investors for non-U.S. securities traded on Nasdaq.     

PERCS, DECS, AND OTHER MANDATORY CONVERTIBLES

From their beginnings in 1988, mandatory convertibles such as PERCS and DECS have grown to account for as much as 25% of a convertible market that experienced new issuance of $20 billion in 1996. Mandatory convertibles usually pay a higher dividend than the company's common stock (generally for a three-year period) and then require the holders to convert into common stock under terms that provide limited appreciation until conversion.
This article examines the rationale for mandatory convertibles from the point of view of issuers as well as investors. Like conventional convertibles securities, mandatory convertibles reduce the costs of the information asymmetry problem that confronts equity issuers. But, to a greater degree than ordinary convertibles, mandatory convertibles provide a solution to the financial restructuring problem faced by highly leveraged (and, in some cases, troubled) companies. They also enable growth companies to signal confidence about their future, particularly by including features such as guaranteed appreciation.
The last section of the article discusses the valuation of three varieties of mandatory convertibles: PERCS, DECS, and mandatory convertibles with a value guarantee. The valuation method builds on the insight that each of these securities can be decomposed into three basic components: (1) the underlying common stock; (2) the fixed-income cash flow promised investors; and (3) the option on the company's stock embedded in the security.     

Reforming the US IPO market: lessons from history and theory

The current US IPO market is inefficient and unfair. To protect their own balance sheets, US investment banks systematically underprice offerings. To ration the cheap securities, the investment banks utilize various nefarious nonprice rationing techniques, including kickbacks. Regulators should reform the market by loosening restrictions against issuers. The early history of the market (1781-1861) shows that unregulated IPO markets can function efficiently. Early US corporations successfully sold equities directly to investors without the aid of intermediaries because they could overcome information asymmetry cheaply. Today, the Information Revolution is again decreasing the cost of reducing information asymmetry between investors and issuers. Regulators could improve upon the past, however, by allowing the market to price ration new shares via an auction method.     

Going Public: An Empirical Investigation of U.S. Bound Israeli IPOs

Between 1985–2003, more than 120 Israeli companies went public in the U.S., bringing the accumulated number of U.S. bound, Israeli initial public offerings (IPOs) to a figure greater than all other foreign countries combined. In this study, we compare the short and long run performance of Israeli IPOs to that of similar international and U.S. IPOs. Holding all else equal, we find that Israeli IPOs are significantly less underpriced than their local and foreign counterparts. As we examine the characteristics of Israeli issuers, we find that they differ than those of other foreign and local issuers in some important dimensions that compensate investors for information asymmetry and risk. First, compared to their home market capitalization size, U.S. bound Israeli IPOs, are significantly larger than the IPOs conducted by their foreign counterparts. Second, Israeli issuers tend to perform better than other foreign and U.S. local IPOs during our entire period of observation. Third, to a large extent, the Israeli firms in our sample have products, licensing or franchising relationships or venture capital funds with strong roots in the U.S. prior to the IPO. And fourth, the relevant investor community of Israeli IPOs, at least at the early stages, is small and overwhelmingly American. Our findings are consistent with prior studies documenting that firms raising capital outside of their domicile country are typically a select group of high quality firms in need of external financing that cannot be sufficiently provided in their home market.     

The links between securities settlement systems: An olihopoly theoretic approach

A duopoly model of the securities settlement industry is presented. Because pooling payments can help in using liquidity efficiently, issuers prefer systems where a large number of securities are issued. If the central securities depositories (CSDs) establish a mutual link that enables investors to make transactions with foreign securities, cost savings can be achieved. However, these links may have unexpected effects on CSDs' pricing, and the issuers' share of the fee burden can increase substantially. It is not advisable to ban additional fees for using the link, as the CSDs might simply increase the fee for domestic transactions.     

The networking function of investment banks: Evidence from private investments in public equity

We examine investment banks' networking function in capital markets, using a sample of Private Investments in Public Equity (PIPEs). We argue that investment banks develop relationships with investors through repeat dealings, and that investment banks' networks of relationship investors form the basis of their networking function. We find that investment banks, especially those with larger investor networks, help issuers attract investors. Correspondingly, an issuer that desires more investors is more likely to hire an investment bank than place the shares directly. We also find that issuers pay higher fees to hire investment banks with larger investor networks. Our empirical findings suggest that the networking function of investment banks is important in securities offerings.     

Financial Economists' Roundtable Statement on THE STRUCTURE OF SECURITIES MARKETS

Market practitioners, regulators, and economists are now debating the merits of a national market system—a single, fully integrated securities market that would be coordinated by a central computer and mandated by the SEC. This brief statement, signed by 29 distinguished financial economists, argues that such a system is a badidea. The multiplicity of U.S. markets is a sign of innovation and vibrant competition, not a problem that requires regulatory intervention. As a variety of markets with different technologies and trading procedures vie for somewhat different groups of customers with different needs, the result is competing market centers—registered exchanges (such as NYSE and AMEX) with designated specialists; NASDAQ with competing dealers; third market dealers in listed securities; and alternative trading systems (regulated as brokers) serving institutional investors or providing on-line trading to individual investors. Moreover, the fact that the different U.S. markets are linked in various ways and degrees—for example, by information and by private order routing systems of brokers and markets—should caution us against viewing market "fragmentation" as a public policy problem in need of a solution     

DIVERGENT EXPECTATIONS AND THE ASIAN FINANCIAL CRISIS OF 1997

An important question concerning integration of global financial markets is whether local investors in an equity market react differently from international investors, particularly during periods of financial crisis. Considering local investors are closer to information, they might turn pessimistic before foreign investors before a crisis. We examine whether local investors in each of the six Asian stock markets—Indonesia, Korea, Malaysia, the Philippines, Taiwan, and Thailand—reacted differently from international investors during the 1997 Asian financial crisis. Our empirical results indicate that, in general, closed‐end country fund share prices (mainly driven by foreign investors) Granger‐cause the respective net asset values (NAVs, mainly driven by local investors). Moreover, this one‐way Granger‐causality effect from share prices to NAVs becomes much stronger during the crisis period after controlling for U.S. stock returns. Our results suggest international investors turned pessimistic before local investors. JEL classification: G15     

MIPS, QUIPS AND TOPrS: OLD WINE IN NEW BOTTLES

Monthly Income Preferred Stock (MIPS), Quarterly Income Preferred Stock (QUIPS), and Trust Originated Preferred Stock (TOPrS) all carry the title of preferred stock. As in the case of other forms of preferred stock, investors cannot force the issuer into bankruptcy if it fails to make a scheduled dividend payment. Unlike conventional preferred stock, however, the dividend payments on these new securities are deductible by the issuer for tax purposes. Thus MIPS, QUIPS and TOPrS appear to provide issuers with in some respects the ideal security–one that offers the tax advantages of debt without the potential for financial distress and its associated costs. And since the first issue of this kind of security in 1993, nearly 300 corporate issuers have raised a total of close to $30 billion with this novel hybrid security. But if these securities appear new, there is another security–namely, income bonds–that has offered these same advantages for at least the past 100 years. After discussing MIPS, QUIPS, and TOPrS in some detail, and the stock market's reaction issuing companies, the article explores the question: Why are tax-deductible preferreds so popular today when income bonds have been shunned for the past 60 years?     

Capital raising in the offshore market

US corporations can raise capital in the offshore market using Regulation S, adopted by the Securities and Exchange Commission (SEC) in 1990 and modified in 1996. We examine how offshore offerings are done under Regulation S, what types of companies use this market, the discount companies offer investors to compensate for illiquidity in the market, and the impact of the new disclosure requirements on capital raising in the offshore market. We find that small firms tend to raise capital in this market. During our sample period before the 1996 rule change the median market capitalization of reporting firms was $16.82 million with a median stock price of $1.13. The mean and median discount offered to foreign investors was 32.84% and 40.53%, respectively. Offerings during this period resulted in average share dilution of 11.97%. We find that before the disclosure requirements, firms were “gaming the system” by giving foreign investors just enough time to resell the securities back into the United States before the initial sale became public information. After the rule changes, Regulation S offerings are not perceived to be “shady”, and larger firms are now using the market, resulting in lower average discount and dilution.     

Pricing,issuance volume,and design of innovative securities: The role of investor information

This study investigates the role of asymmetric information for the pricing, issuance volume, and design of innovative securities. By analyzing the information that structured product issuers provide to the investors of those products, we can identify specific sources of asymmetric information between the issuers and investors in this market. We show that issuers exploit this information friction to offer products to investors that appear more profitable for the issuer. In addition, we find that the friction induces issuers to design products with higher information asymmetry. Our results suggest that product issuers’ behavior increases information frictions in the financial system.