What Is a Eurobond?
A Eurobond is a debt instrument issued by an organization outside the borders of its home country but denominated in a currency other than the currency of the country where it is issued. Eurobonds are important because they provide organizations with the flexibility to raise capital in a foreign currency. It is important to note that the term "Eurobond" does not necessarily mean that the bond was issued in Europe.
Eurobonds, classified as external bonds, are debt instruments issued in a currency different from the issuing country's or market's home currency. These bonds, such as eurodollar or Euro-yen bonds, are pivotal in facilitating capital raising for organizations by offering the option to issue in an alternative currency. The issuance process involves an international syndicate of financial institutions representing the borrower. Among these institutions, one may underwrite the bond, ensuring the complete purchase of the entire issue. This strategic approach to cross-currency debt issuance enhances financial flexibility and widens the capital-raising landscape for organizations.
Eurobonds: A Flexible Financing Solution
Eurobonds stand out as a versatile financing tool, allowing issuers to select the issuance country based on regulatory considerations, interest rates, and market depth. Investors find them appealing due to their typically low par values, offering a cost-effective investment. Additionally, Eurobonds boast high liquidity, facilitating easy buying and selling transactions.
It's crucial to clarify that the term "Eurobond" does not necessarily imply issuance in Europe or denomination in the euro currency. Rather, it signifies that the bond is issued outside the borders of the currency's home country. For instance, a company may issue a Eurobond denominated in US dollars in Japan, exemplifying the global nature of this financial instrument.
Inaugural Eurobond: A Historical Milestone
Autostrade, the entity overseeing Italy's national railroads, made history in 1963 by issuing the first Eurobond. This groundbreaking $15 million eurodollar bond, crafted by London-based financiers, was executed at Amsterdam Airport Schiphol and disbursed in Luxembourg, strategically minimizing tax implications. The issuance not only pioneered the Eurobond market but also presented European investors with a secure avenue for dollar-denominated investments.
Diverse entities, ranging from multinational corporations to sovereign governments and supranational organizations, engage in Eurobond issuance. Individual bond issuances often exceed a billion dollars, featuring maturities spanning five to 30 years, with a prevalent focus on those maturing within a decade. Particularly advantageous for issuers hailing from nations with limited capital markets, Eurobonds simultaneously offer investors a pathway to portfolio diversification.
Modernized Eurobond Issuance: Electronic Delivery and Bearer Form
Eurobonds, once physically delivered, have evolved into electronic issuances facilitated by platforms like the Depository Trust Company (DTC) in the US and the Certificateless Registry for Electronic Share Transfer (CREST) in the UK. Typically issued in bearer form, Eurobonds provide investors with a convenient way to navigate regulations and taxation. In bearer form, bonds remain unregistered, eliminating ownership records and relying solely on physical possession as proof of ownership.
Global Bond Market Dynamics
With a vast outstanding debt exceeding $100 trillion, the global bond market is a substantial financial entity. Eurobonds, often unregistered and traded in bearer form, present challenges in pinpointing precise sector figures, yet indications suggest they constitute approximately 30% of the total market. A rising proportion of Eurobond issuance stems from emerging market nations, reflecting a strategic move by both governments and companies to tap into more extensive and mature borrowing markets.
Eurobonds serve as an organization's strategic instrument, allowing them to raise capital beyond their home country's borders in a foreign currency. The flexibility afforded by bonds in selecting issuance countries and currencies enhances financial adaptability. Notably, the term "Eurobond" transcends geographic confines, emphasizing its global issuance nature. From its historic inception by Autostrade in 1963 to modern electronic delivery methods, Eurobonds have evolved, contributing significantly to the diverse dynamics of the global bond market, which exceeds $100 trillion. As emerging markets increasingly participate, Eurobonds continue to play a pivotal role in shaping the multifaceted landscape of international finance.