A Eurobond is a debt instrument that's denominated in a currency other than the home currency of the country or market in which it is issued. Eurobonds are frequently grouped together by the currency in which they are denominated, such as eurodollar or Euro-yen bonds. Since Eurobonds are issued in an external currency, they're often called external bonds. Eurobonds are important because they help organizations raise capital while having the flexibility to issue them in another currency.
Issuance of Eurobonds is usually handled by an international syndicate of financial institutions on behalf of the borrower, one of which may underwrite the bond, thus guaranteeing the purchase of the entire issue.
Key Takeaways
A Eurobond is a debt instrument that's denominated in a currency other than the home currency of the country or market in which it is issued.
Eurobonds are important because they help organizations raise capital while having the flexibility to issue them in another currency.
Eurobond refers only to the fact the bond is issued outside of the borders of the currency's home country; it doesn't mean the bond was issued in Europe.
The popularity of Eurobonds as a financing tool reflects their high degree of flexibility as they offer issuers the ability to choose the country of issuance based on the regulatory landscape, interest rates, and depth of the market. They are also attractive to investors because they usually have small par values or face values providing a low-cost investment. Eurobonds also have high liquidity, meaning they can be bought and sold easily.
The term Eurobond refers only to the fact the bond is issued outside of the borders of the currency's home country; it does not mean the bond was issued in Europe or denominated in the euro currency. For example, a company can issue a Eurobond denominated in U.S. dollars in Japan.
Background
The first Eurobond was issued in 1963 by Autostrade, the company that ran Italy's national railroads. It was a $15 million eurodollar bond designed by bankers in London, issued at Amsterdam Airport Schiphol and paid in Luxembourg to reduce taxes. It provided European investors with a safe, dollar-denominated investment.
Issuers run the gamut from multinational corporations to sovereign governments and supranational organizations. The size of a single bond issuance can be well over a billion dollars, and maturities are between five and 30 years, although the largest portion has a maturity of fewer than 10 years. Eurobonds are especially attractive to issuers based in countries that do not have a large capital market while offering diversification to investors.
Delivery
The earliest Eurobonds were physically delivered to investors. They are issued electronically through a range of services, including the Depository Trust Company (DTC) in the United States and the Certificateless Registry for Electronic Share Transfer (CREST) in the United Kingdom. Eurobonds are usually issued in bearer form, which makes it easier for investors to avoid regulations and taxes. Bearer form means the bond isn't registered and as a result, there's no record of ownership. Instead, physical possession of the bond is the only evidence of ownership.
Market Size
The global bond market totals over $100 trillion in outstanding debt. The fact many Eurobonds are unregistered, and trade-in bearer form makes definitive numbers for the sector impossible to obtain, but it is likely they account for about 30% of the total. A growing portion of Eurobond issuance is from emerging market nations, with both governments and companies seeking deeper and more developed markets in which to borrow.
Eurobonds typically have a low par value and are highly liquid in addition to offering foreign diversification without investors having to personally convert their money into foreign currency. Issuers are able to attract more investors and receive funds in US currency.
A Eurobond is a bond issued offshore by governments or corporates denominated in a currency other than that of the issuer's country. Eurobonds are usually long-term debt instruments. Eurobonds are typically denominated in US Dollars (USD).
Explanation: One advantage of bonds for their issuers is that when a company issues bonds, it is obligated to make fixed interest payments, even when it doesn't make a profit.
Avoiding currency conversion. Offering companies in developing nations access to the stability of dollars. High liquidity, low-face-value investments. Investing abroad while receiving payments in one's own currency.
What disadvantage do bonds present for the issuer? Issuer pays set amount of interest even in bad years or if interest rates drop. The bonds of a firm in poor financial health may be downgraded, making them hard to sell unless offered at a discount or high interest rate.
All bonds carry some degree of "credit risk," or the risk that the bond issuer may default on one or more payments before the bond reaches maturity. In the event of a default, you may lose some or all of the income you were entitled to, and even some or all of principal amount invested.
Banks place greater restrictions on how a company can use the loan and are more concerned about debt repayment than bondholders. Bond markets tend to be more lenient than banks and are often seen as easier to deal with. They leave it to the rating agencies to grade the bonds and make their decisions accordingly.
Investors in Eurobonds face the risk of currency fluctuations, as changes in exchange rates can affect the value of their investments and the income they receive.
Eurobonds are the bonds denominated in a currency other than that of the country in which they are issued. A bond denominated in Japanese Yen and issued in the UK, or a bond denominated in US dollars and issued in France or the UK are examples of Eurobonds.
A Eurobond is a bond that is issued in a currency other than the currency of the country where it is issued. They provide a platform for governments, multinational corporations, and international organisations to raise significant capital outside their domestic markets.
A key disadvantage of bonds is that they are debt. The corporation must make its bond interest payments. If a corporation cannot make its interest payments, the bondholders can force it into bankruptcy. In bankruptcy, the bondholders have a liquidation preference over investors with ownership—that is, the shareholders.
When companies want to raise capital, they can issue stocks or bonds. Bond financing is often less expensive than equity and does not entail giving up any control of the company. A company can obtain debt financing from a bank in the form of a loan, or else issue bonds to investors.
Advantages and Disadvantages of Eurocurrency Markets
They can simultaneously offer lower interest rates for borrowers and higher interest rates for lenders. That is mostly because eurocurrency markets are less regulated. On the downside, eurocurrency markets face higher risks, particularly during a run on the banks.
Bond prices fluctuate negatively in a rising rate environment. Investors know this very well after unprecedented increases in interest rates in 2022 and 2023. Investors in bonds face the potential of owning a vehicle that pays below market rates for years.
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