What Is a Eurobond?
A Eurobond is a debt instrument denominated in a currency different from the home currency of the market in which it is issued. Frequently classified by the currency in which they are denominated, such as eurodollar or Euro-yen bonds, Eurobonds are also known as external bonds. They play a vital role in facilitating capital-raising activities for organizations with the added flexibility of issuing in another currency.
Issuance of Eurobonds is typically managed by an international syndicate of financial institutions on behalf of the borrower. One of these institutions may underwrite the bond, guaranteeing the purchase of the entire issue.
Key Benefits
- Flexible Currency Options: A Eurobond allows issuers to raise capital in various currencies.
- Global Reach: The allure extends beyond Europe, allowing bonds to be issued anywhere in the world.
- Liquidity: Eurobonds are sought after due to their high liquidity and small par values.
Understanding Eurobonds
The popularity of Eurobonds stems from their remarkable flexibility. By giving issuers the option to select the country of issuance based on favorable regulatory environments, interest rates, and market depth, Eurobonds have become an unparalleled financial tool. Eurobonds provide a cost-effective investment opportunity, given their high liquidity and typically smaller face values.
Contrary to what the name might suggest, ‘Eurobond’ signifies issuance outside the home country of the currency, not within Europe. For instance, a Eurobond can be U.S. dollar-denominated yet issued in Japan.
Background
The first Eurobond was introduced in 1963 by Autostrade, the Italian company managing national highways. It was a $15 million eurodollar bond, crafted by bankers in London, issued at Amsterdam Airport Schiphol and paid in Luxembourg to minimize taxes. This innovation provided European investors with a secure, dollar-denominated investment.
Issuers of Eurobonds range from multinational corporations to sovereign governments and supranational organizations. Issuances can surpass a billion dollars with maturities from five to 30 years, although many mature in under 10 years.
Technological Evolution
Initially, Eurobonds were physically delivered, but today they are issued electronically through services such as the Depository Trust Company (DTC) in the United States and CREST in the United Kingdom. Most Eurobonds are in bearer form, allowing investors to sidestep regulations and taxes. In bearer form, physical possession of the bond symbolizes ownership as there is no record of it.
Market Dynamics
The global bond market boasts over $100 trillion in outstanding debt. Although Eurobonds are often unregistered and trade in bearer form, making precise figures challenging to ascertain, it is estimated they account for around 30% of the total market. Emerging markets constitute a substantial portion of new Eurobond issuances, as both governments and companies aim to tap into more developed financial markets.
Related Terms: syndicate, liquidity, emerging market.
