Risks Involved In Raising Finance Internationally

A company can do international financing by either issuing equity shares or raising debt in the international capital market. The issue of equity shares for raising capital does not involve any exchange risk as a company is not required to return the money procured through the issue of equity capital. However the same is not true in the case of debt financing. The money raised through the issue of debt has to be returned in future. Therefore debt financing poses a risk the degree of which depend upon the fluctuations in the exchange rates. International borrowings can be broadly categorized into three classes on the basis of foreign exchange risk involved.

• Financing in the currency in which cash inflows are expected.
• Financing in a currency other than that in which cash inflows are expected, but with cover in the forward or swap market.
• Financing in currency other than in which cash inflows are expected, but without forward cover or an appropriate swap

Financing by way of the first two methods avoids foreign exchange risk. Financing through the third option is risky. While the interest rates and capital repayments are fixed in foreign currency terms, the amount of home currency required to serve and repay the debt is not known with certainty due to the fluctuating exchange rates.

International borrowing is safer when:

• Stability in Exchange rates
• Inflows are expected in the same currency in which borrowing is effected and
• Cash inflows are expected in a currency other than the currency of borrowings but a forward cover or an appropriate swap is available.

Globalization of capital markets has led to supply of cross border equity from the emerging capital markets for cross listing and this in turn has fostered intense competition in major international exchanges. Firms all over the world now have broader investor groups and the most commonly used vehicles for cross listing are American Depository Receipts (ADRs) and Global Depository Receipts (GDRs).