EUROBOND MARKET



Eurobond Market 370
Photo by: ElenaR

The Eurobond market is made up of investors, banks, borrowers, and trading agents that buy, sell, and transfer Eurobonds. Eurobonds are a special kind of bond issued by European governments and companies, but often denominated in non-European currencies such as dollars and yen. They are also issued by international bodies such as the World Bank. The creation of the unified European currency, the euro, has stimulated strong interest in euro-denominated bonds as well; however, some observers warn that new European Union tax harmonization policies may lessen the bonds' appeal.

Eurobonds are unique and complex instruments of relatively recent origin. They debuted in 1963, but didn't gain international significance until the early 1980s. Since then, they have become a large and active component of international finance. Similar to foreign bonds, but with important differences, Eurobonds became popular with issuers and investors because they could offer certain tax shelters and anonymity to their buyers. They could also offer borrowers favorable interest rates and international exchange rates.

DEFINING FEATURES

Conventional foreign bonds are much simpler than Eurobonds; generally, foreign bonds are simply issued by a company in one country for purchase in another. Usually a foreign bond is denominated in the currency of the intended market. For example, if a Dutch company wished to raise funds through debt to investors in the United States, it would issue foreign bonds (dollar-denominated) in the United States. By contrast, Eurobonds usually are denominated in a currency other than the issuer's, but they are intended for the broader international markets. An example would be a French company issuing a dollar-denominated Eurobond that might be purchased in the United Kingdom, Germany, Canada, and the United States.

Like many bonds, Eurobonds are usually fixed-rate, interest-bearing notes, although many are also offered with floating rates and other variations. Most pay an annual coupon and have maturities of three to seven years. They are also usually unsecured, meaning that if the issuer were to go bankrupt, Eurobond holders would normally not have the first claim to the defunct issuer's assets.

However, these generalizations should not obscure the fact that the terms of many Eurobond issues are uniquely tailored to the issuers' and investors' needs, and can vary in terms and form substantially. A large number of Eurobond transactions involve elaborate swap deals in which two or more parties may exchange payments on parallel or opposing debt issues to take advantage of arbitrage conditions or complementary financial advantages (e.g., cheaper access to capital in a particular currency or funds at a lower interest rate) that the various parties can offer one another.

MARKET COMPOSITION

The Eurobond market consists of several layers of participants. First there is the issuer, or borrower, that needs to raise funds by selling bonds. The borrower, which could be a bank, a business, an international organization, or a government, approaches a bank and asks for help in issuing its bonds. This bank is known as the lead manager and may ask other banks to join it to form a managing group that will negotiate the terms of the bonds and manage issuing the bonds. The managing group will then sell the bonds to an underwriter or directly to a selling group. The three levels—managers, underwriters, and sellers—are known collectively as the syndicate. The underwriter will actually purchase the bonds at a minimum price and assume the risk that it may not be possible to sell them on the market at a higher price. The underwriter (or the managing group if there is no underwriter) sells the bonds to a selling group that then places bonds with investors. The syndicate companies and their investor clients are considered the primary market for Eurobonds; once they are resold to general investors, the bonds enter the secondary market. Participants in the market are organized under the International Primary Market Association (IPMA) of London and the Zurich-based International Security Market Association (ISMA).

After the bonds are issued, a bank acting as a principal paying agent has the responsibility of collecting interest and principal from the borrower and disbursing the interest to the investors. Often the paying agent will also act as fiscal agent, that is, on the behalf of the borrower. If, however, a paying agent acts as a trustee, on behalf of the investors, then there will also be a separate bank acting as fiscal agent on behalf of the borrowers appointed.

In the secondary market, Eurobonds are traded over-the-counter. Major markets for Eurobonds exist in London, Frankfurt, Zurich, and Amsterdam.

SEE ALSO : Capital Markets

FURTHER READING:

"Bye-Bye Eurobonds?" Economist, 12 December 1998.

Dobson, Rebecca. "Tussling for the Bulge Bracket." Euromoney, May 1998.

Gallant, Peter. The Eurobond Market. New York: New York Institute of Finance, 1988.

Grabbe, J. Orlin. International Financial Markets. 3rd ed. Englewood Cliffs, NJ: Prentice Hall, 1995.

Reed, Stanley. "The Dazzling Debut of the Euro Bond." Business Week, I February 1999.



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