Eurobond: International Bonds in Foreign Currencies

August 25, 2024 4 min read Finance Investments Bonds International Finance Investments Currencies Global Markets

An in-depth exploration of Eurobonds, bonds denominated in foreign currencies and sold to investors outside their native countries.

A Eurobond is a bond issued in a currency other than the currency of the country or market in which it is issued. Contrarily to what the name might imply, Eurobonds are not restricted to being denominated in the Euro and may be issued in any key global currency, such as the U.S. dollar. These bonds are typically sold to investors outside the country whose currency is utilized for the denomination of the bond.

Characteristics of Eurobonds

Issuance and Underwriting

Eurobonds are usually issued by large underwriting groups composed of banks, financial institutions, and issuing houses from multiple countries. This international collaboration helps in diversifying the risk and ensuring a broader market reach. Typically, the bonds are syndicated, meaning they are sold by a group of investment banks that share the overall risk and proceeds of the issuance.

Denomination and Currency

Eurobonds can be denominated in any freely convertible currency, including but not limited to U.S. dollars (USD), Euros (EUR), Japanese yen (JPY), and British pounds (GBP). The choice of currency may depend on various factors such as the issuer’s preference, the target investor base, and current financial market conditions.

Maturity and Interest Rates

The maturity of Eurobonds can vary significantly, ranging from short-term notes to long-term bonds. Interest rates may be fixed or floating, and they typically reflect the current economic conditions and the risk associated with the specific issuer.

Types of Eurobonds

Straight Eurobonds

These are the most basic form of Eurobonds, with a fixed interest rate and a specific maturity date. Payments are made periodically, usually semi-annually, until maturity when the principal amount is repaid.

Convertible Eurobonds

Convertible Eurobonds can be converted into a predetermined number of shares of the issuing company. This feature provides the investor with an option to benefit from potential equity appreciation.

Floating Rate Eurobonds

The interest rate on floating rate Eurobonds is tied to a benchmark, such as LIBOR or EURIBOR, and adjusts periodically in line with fluctuations in that benchmark rate.

Historical Context

Eurobonds emerged in the 1960s as a way for companies to access international capital markets. The development was significantly driven by the need for large sums of money for post-war reconstruction and economic growth. One of the earliest notable Eurobond issues was by Autostrade, an Italian company, in 1963, which was denominated in U.S. dollars.

Applicability and Uses

Corporate Financing

Corporations use Eurobonds to raise capital without being subject to the regulatory requirements of any single country’s securities laws, thus providing flexibility and often lower costs.

Sovereign and Supranational Issues

Governments and supranational organizations like the World Bank issue Eurobonds to fund large-scale infrastructure projects and various developmental initiatives.

Diversification for Investors

For investors, Eurobonds offer an opportunity to diversify their portfolios by gaining exposure to foreign currencies and international credit markets.

Comparison with Other Bonds

Domestic Bonds

Unlike domestic bonds, Eurobonds are issued in the international market and typically in a foreign currency. Domestic bonds are subject to the regulatory frameworks of their domestic markets, whereas Eurobonds are often less regulated.

Foreign Bonds

Foreign bonds are similar to Eurobonds but are issued in a domestic market by a foreign borrower and denominated in the country’s own currency. An example is a Yankee bond, which is a U.S. dollar-denominated bond issued in the U.S. by a foreign borrower.

FAQs

What is the main advantage of Eurobonds for issuers?

Eurobonds provide issuers with the flexibility to choose the currency of issuance and access a global pool of investors, often resulting in lower costs of borrowing.

How do Eurobonds benefit investors?

Investors benefit from the diversification opportunities provided by Eurobonds, as they can invest in different currencies and international credit markets, potentially hedging against domestic economic downturns.

Are Eurobonds regulated?

Eurobonds are generally subject to less stringent regulatory oversight compared to domestic bonds, although they still adhere to international financial laws and agreements.

Yankee Bond: A U.S. dollar-denominated bond issued in the United States by non-U.S. entities, subject to U.S. regulations.
Bulldog Bond: A bond issued in the United Kingdom by a non-U.K. entity, denominated in British pounds, and subject to British regulations.
Samurai Bond: A Japanese yen-denominated bond issued in Japan by a non-Japanese entity, within the regulatory framework of Japan.

References

Fabozzi, F. J., & Modigliani, F. (2003). “Capital Markets: Institutions and Instruments.” Prentice Hall.
Einzig, P. (2014). “Eurobonds: International Capital Markets.” Palgrave Macmillan.
Lastra, R. M. (2006). “Legal Foundations of International Monetary Stability.” Oxford University Press.

Summary

Eurobonds are a versatile and widely utilized financial instruments in the international capital markets. They provide issuers with an effective means to raise funds globally while offering investors diversification benefits. Over time, Eurobonds have become a cornerstone of global financial practices, underscoring their significance in contemporary finance.