International Debt Instruments

Debt management, whether at the domestic or international level, is part of the company’s armoury of techniques which is designed to maximize the present value of shareholder wealth. It is often speculated that the key determining factors are as follows:

• The amount of business risk affecting the firm.
• The ability of the firm to service debt, in terms of interest payments and capital repayments, under varying scenarios regarding future outturns.
• The limits imposed by financiers’ lending policies and practices.
• The perceived norm for the sector.
• The firm's historic track record in terms of debt raised and the volatility of its earnings.

Beyond the debt / equity ratio, there are a number of factors include maturity profile, fixed / floating interest mix, interest rate sensitivity and currency mix.

Long-term assets should be funded by long-term finance; short-term assets would logically be backed by short-term funds. In terms of maturity profits of debt, the treasurer is well advised to ensure that repayments of borrowings are evenly spread. This reduces exposure to repayment vulnerabilities, which may be magnified due to unforeseen recession.  Short-term debt is riskier than long-term debt. Long-term interest rates are generally more stable over time then short-term rates. The firm which borrows predominantly on a short-term basis may experience widely fluctuating interest rate payments. Short-term borrowings have to be renewed regularly.

The interest rate on a fixed rate loan is fixed for the entire life of the loan regardless of changes in market conditions. A floating rate loan is one where the interest rate varies in line with the market. The loans are usually made at an agreed margin over a published market rate. This may be a clearing bank’s base rate for sterling or prime rate for US dollar, or LIBOR (London inter-bank offered rate) for term loans whether in sterling, dollars or Eurocurrency, and so on.