Eurobonds

Eurobonds
Name	Eurobond
Market	Eurobond market
Currency	Various (e.g., US dollar, Euro, Japanese yen)
Issuers	Corporations, sovereign governments, supranational entities
Primary regulation	International Capital Market Association (ICMA)

Eurobonds. A Eurobond is an international bond issued and traded outside the country in whose currency its value is denominated, and outside the regulations of a single national market. These instruments are a cornerstone of the global capital market, allowing borrowers to access a vast pool of international investment capital. They are typically issued by large corporations, sovereign governments, and supranational entities like the World Bank.

Definition and Characteristics

A Eurobond is defined by its issuance outside the domestic jurisdiction of the currency in which it is denominated. For instance, a bond issued in London denominated in US dollars is a classic Eurobond, often called a Eurodollar bond. Key characteristics include being issued by an international syndicate of banks, listed on exchanges such as the Luxembourg Stock Exchange or the London Stock Exchange, and paying interest annually without deduction of withholding tax. The bonds are typically bearer instruments, providing anonymity, and are governed by English law or New York law.

History and Development

The modern Eurobond market originated in 1963 with an issue for the Italian autostrada network, Autostrade, arranged by S.G. Warburg & Co. This innovation was driven by the Interest Equalization Tax in the United States, which pushed borrowers and investors to seek offshore dollar financing. The market expanded rapidly with issues for entities like the European Investment Bank and Japanese corporations. The Bretton Woods system collapse and the 1973 oil crisis further fueled growth by recycling petrodollars. Landmark deals included early issues for Norway and the European Coal and Steel Community.

Types of Eurobonds

Eurobonds are categorized primarily by the currency of denomination and interest structure. The most common type is the fixed rate bond, offering a constant coupon. Floating rate notes, such as those tied to the LIBOR, are also prevalent. Other varieties include zero-coupon bonds, sold at a deep discount, and convertible bonds, which can be exchanged for the issuer's equity. Currency-specific names persist, like Euroyen bonds or Eurosterling bonds, denoting issues in Japanese yen and Pound sterling, respectively.

Market Structure and Issuance

The primary market is dominated by major international investment banks like Goldman Sachs, J.P. Morgan, and Deutsche Bank, which form underwriting syndicates. The issuance process involves drafting a prospectus, credit assessment by agencies like Moody's or S&P, and pricing via bookbuilding. Secondary trading occurs over-the-counter, coordinated by the International Capital Market Association rather than on a centralized exchange. Key trading hubs are London, Luxembourg, and Zurich.

Advantages and Disadvantages

For issuers, advantages include access to a large, diversified investor base, potentially lower borrowing costs than domestic markets, and flexibility in currency choice to match revenue streams. The absence of withholding tax and less stringent SEC-style registration are significant benefits. Disadvantages involve exposure to foreign exchange risk and complex cross-border legal arrangements. For investors, Eurobonds offer portfolio diversification and higher yields but carry risks like sovereign risk on emerging market issues and lower liquidity compared to major domestic bonds like Treasuries.

Regulatory and Legal Framework

The Eurobond market is largely self-regulated through the International Capital Market Association in Zurich, which publishes the ICMA Rule Book. Key governing laws are English law and New York law, with trustee roles often held by institutions like The Bank of New York Mellon. While largely offshore, regulations like the U.S. Securities Act of 1933 (via Regulation S) and the European Union's Prospectus Directive influence issuance. Tax evasion concerns have led to increased scrutiny under initiatives like the Foreign Account Tax Compliance Act (FATCA).

Category:Bonds (finance) Category:International finance