Eurobond

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EurobondWhat Does Eurobond Mean? A bond issued in a currency other than the currency of the country or market in which it is issued. Usually, a eurobond is issued by an international syndicate and categorized according to the currency in which it is denominated. A eurodollar bond that is denominated in U.S. dollars and issued in Japan by an Australian company would be an example of a eurobond. The Australian company in this example could issue the eurodollar bond in any country other than the U.S. Eurobonds are attractive financing tools as they give issuers the flexibility to choose the country in which to offer their bond according to the country's regulatory constraints. They may also denominate their eurobond in their preferred currency. Eurobonds are attractive to investors as they have small par values and high liquidity.

EUROBOND MARKETThe 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 eurodenominated 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 FEATURESConventional 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 COMPOSITIONThe 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 levelsmanagers, 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.

Eurobonds Terms and AbbreviationsAIBD (Association of International Bonds Dealers): Organization founded in 1969 in Switzerland, with the purpose to establish uniform new issuance and trading practices in the Eurobond market.

Aladdin Bond: A new Eurobond issue exchanged for an old bond issue. Appreciation: Increase in the market value of an asset relative to a second asset. Basis: The price of a commodity (cash or spot) minus the future price of it. Best Efforts Basis: An offer made by the lead manager to a Eurobond issuer to place the issue at the best price negotiable. BIS (Bank for International Settlements): A bank located in Basel, Switzerland, founded in the thirties to handle the payment of German reparations after WW1. Currently the bank monitors international banking activity and operates as a clearing system for the European Monetary System. Bulldog Bonds: GBP denominated foreign bonds offered in United Kingdom. Cedel: A major clearing system (together with Euroclear) in the Eurobond market. Cedel is based in Luxemburg and is jointly owned by several European banks. It began its operations in 1971. Closing Day: It is the day on which new bonds from the issuer are delivered against payment by members of a Eurobond issuing syndicate. This occurs about 14 days after the offering of a new issue. Coupon: The detachable part of the Eurobond certificate that represent the periodic interest payment on it. Coupon Yield: The interest yield on a Eurobond when calculated as the annual amount of money paid on coupons divided by the face value of the bond. Droplock Bond: A Eurobond which starts as an FRN. Dual-currency Eurobond: A Eurobond denominated in one currency with a coupon or repayment of principal at a fixed rate in another currency.

Euroclear: A major clearing system (together with Cedel) in the Eurobond market. Euroclear Clearance System Ltd. is located in Brussels and is operational since 1968. Eurodollar Bonds: Eurobonds denominated in US Dollars. Face Value: The nominal amount paid on a Eurobond at redemption, excluding any final coupon payment. Global Bond: Temporary debt certificate issued by a Eurobond borrower, representing the borrowers total indebtedness. Grey Market: A forward market for newly issued Eurobonds. This is a market that takes the form of forward contracting between market participants during the period between the announcement day of a new issue and the closing day. Issue Price: The price at which a new Eurobond is announced. The issue price is stated as a percentage of the bonds face value. Kassenverein: Depositary banks which form the Eurobond clearing system in Germany. Lock-up: Terms used to refer to procedures following in a Eurobond issue to prevent the sale of securities to US investors during the period of initial distribution. This is in order to meet the terms and conditions of the Securities Act 1933. Management Fee: The part of the total investment banking fees accruing to the management group in a Eurobond issue. Negative Pledge: A contractual undertaking by a borrower in a Eurobond issue not to undertake certain future actions. For example, not to offer future creditors improved rights, with regards to those possessed by existing creditors. Offering Day: The day on which a Eurobond issuer and the managing group sign the subscription agreement containing the final specification of a new issue. Participation: Term to refer to the status of taking part in a new

Eurobonds issue, and specifically to the size of the underwriting commitment. Redemption: Discharge on a Eurobond obligation by the issuer by payment of the bonds face value to the holder. Samurai Bonds: Yen denominated foreign bonds issued in Tokyo. Seasoned Eurobonds: Eurobonds that for more than 90 days have traded in the secondary market. Straight Eurobonds: Eurobonds with fixed-rate coupons and without any features which could be classified as options. Tombstone: Advertisement placed in the specialised press by banks participating in an underwriting syndicate for a Eurobond issue to record their role in managing and underwriting the issue. Yankee Bond: A US Dollar denominated foreign bond issued in New York. Zero-coupon Bond: Eurobond that pays no interests but which is redeemed at its face value at maturity. Zero coupon bonds are also k