Eurobonds are not euro bonds. Euro bonds are bonds denominated in euros and sold in the Eurozone. Eurobonds are bonds denominated in a currency different from the currency of the countries in which they are issued and sold. The name Eurobond has nothing to do with euros or even with Europe. Eurobonds are issued to sell in an expanded market or to avoid the laws and regulations of the country in which the currency is based. Many of these bonds have special names:
- samurai bonds are yen denominated bonds issued outside of Japan;
- Eurosterling bonds are denominated in sterling, but are issued outside of the United Kingdom;
- Eurodollar bonds pay in USD, but are issued outside of the United States.
Eurobonds were 1st issued in 1963. Standard maturities include 3, 5, 7 and 10 years, although some have longer maturities of 15 to 30 years. They are not subject to interest withholding tax, since they are sold outside of the currency country. The Eurobond market really took off when countries, such as Russia and the OPEC countries, accumulated surplus dollars. They did not want to use banks within United States jurisdiction to hold their dollars, since they could be seized, so most of them parked their money in European banks. Most issuers are supranational agencies, such as the World Bank, sovereigns, government agencies, and corporations.
Because Eurobonds are bearer bonds and are not regulated like domestically issued bonds, Eurobond holders are anonymous, whereas most domestically issued bonds are registered, allowing authorities to identify the holders. Although Eurobonds are not regulated like registered bonds, the International Capital Markets Association (ICMA), a self-regulatory body does impose some restrictions and regulations, and standardizes procedures on the issuance of Eurobonds.
Eurobonds offer a lower cost of financing for transnational companies and governments that require other currencies to conduct international business or to finance projects. Most Eurobonds are investment-grade. Denominations are stipulated as lots or pieces, which is the amount of currency of the issue — of 1000, 5000, or 50,000 lots or pieces. Most Eurobonds are traded over-the-counter but some are listed on exchanges located in London, Luxembourg, and Dublin. However, there is not much of a secondary market for Eurobonds; most secondary trading occurs with dealers rather than other investors.
When the Eurobond market began, European countries had different currencies, so traders were organized by currency. With the advent of the euro, traders started specializing by sector. Transactions were done by telephone. Salespeople took orders from institutional investors and other traders and relayed the orders to their brokers. Nowadays, more and more trading is being done electronically, since it is much more efficient.
Eurobonds can have diverse characteristics, some of which are tailored for specific investors, such as pension funds. The most common types include the following:
- Straight fixed-rate bonds pay an annual coupon at a rate that is fixed for the term of the bond.
- Equity bonds have either attached warrants, which give the holder the right to buy another asset, usually shares of the issuing corporation, at a specified price; or they are convertibles that can be converted into shares of the issuer.
- Floating-rate notes have a variable coupon that is reset regularly, usually every 3 or 6 months as a spread above a reference rate, usually the libor; terms range from 5 to 12 years.
- Zero-coupon bonds pay no interest but are issued at a discount. The bondholder receives interest as a difference between the par value, which is received at maturity and the discount price paid.
- Other types of bonds include reverse floaters with coupons that decline as interest rates rise and capped bonds where interest rates are capped at a preset level.
Issuers that issue a large amount of debt, especially if they are less creditworthy, sometimes sell bonds with coupon step-ups or step-downs: coupons are increased if the credit rating of the issuer is downgraded by the credit rating agencies and stepped back up when they are upgraded.
Many Eurobonds are issued by corporations. Transactions are usually governed by UK law, since London is the center of most Eurobond activity. In some instances, New York State law applies. Although Eurobonds vary widely, corporate Eurobonds generally have common provisions in their covenants.
They are generally not secured. However, most bonds are senior debt and issuers are prohibited from creating security interests on its assets unless all bondholders receive the same security. Additionally, most covenants prohibit the sale or transfer of material assets or subsidiaries, although the definitions of such can vary widely. Cross-default clauses are common, requiring the issuer to repay the Eurobond holders if they default on any other borrowings. Usually, there is a certain threshold for default, so that minor disputes do not allow the bondholders to put the bonds to the issuer.