International Corporate Finance: Value Creation with Currency Derivatives in Global Capital Markets, + Website

CHAPTER 10

Sourcing Debt from Global Bond Markets

If you can look into the seeds of time, and say which grain will grow and which will not, speak to me.

Shakespeare

JetBlue Airlines was seeking to raise $250 million in a seven-year note to upgrade its aging fleet. Ms. Rousse—JetBlue's newly appointed CFO—was reviewing the different funding options offered by its investment bankers, which included a domestic dollar-denominated zero-coupon bond priced at 61 percent, a dollar-denominated Eurobond with a 7.25 percent annual coupon, and a samurai bond denominated in yen with a semiannual coupon of 4.00 percent. Last, a floating-rate note denominated in euros paying euro-LIBOR + 165 basis points was also being considered. Ms. Rousse was perplexed by the array of currency denominations and the significant differences in nominal interest rates, both of which complicated direct comparisons among the funding options.

Ms. Rousse was not alone in trying to make the best of this complicated world of bond financing in which a plethora of debt instruments with exotic names turns a seemingly simple debt financing decision into a challenging computational exercise, only to be qualified by global strategic considerations. She was particularly intrigued by the seemingly inexpensive samurai bond but could not help recalling one of her vivid B-school finance classes:

In a world of efficient currency markets and integrated capital markets, optimal currency denomination for long-term debt sourcing ...