This article seeks to help readers better navigate the world of eurobonds. Despite the fact that they contain the word euro within their fold, eurobonds have no ties to the European Union or European governments. Read on to understand what eurobonds are, who issues them and how those who choose to invest in them can benefit from the same.
A eurobond can be understood to be a bond issued in a currency that differs from that which prevails across the country or market within which it has been issued. Although its name might lead one to believe that it has ties to Europe or the “euro” currency, there exist no ties between the two. Owing to the fact that it serves as an external currency of sorts, bonds issued with it are also referred to as external bonds.
The word “euro” within the term eurobond is meant to mean external. The “e” is intentionally meant to remain in lower case as when the “e” is capitalized, it refers to bonds issued by the European Union as well as those issued by European governments.
The name of a eurobond can reflect the currency in which it has been denominated. For instance, an Indian-based company may seek to issue a U.S. dollar-denominated euro-dollar bond in Australia. Or an international banking syndicate could seek to issue euro-dirham bonds in Thailand, which are denominated by the United Arab Emirates dirham.
Understanding how Eurobonds Operate
Eurobonds function on the understanding that a company selects a country within which it seeks to issue bonds keeping in mind the said country’s economic and regulatory environment. This means the company would consider the country’s prevailing rates of interest, their economic cycle and the market sizes among other factors. Investors find these bonds appealing owing to the small notational amount of the eurobonds which can be understood to be their par value which further implies that they are more affordable options that can be availed with greater ease.
For the most part, it is important to understand that eurobonds are highly liquid and are capable of being converted into cash within a single fiscal year.
As established in the previous section, eurobonds are categorized in accordance with the currency in which they have been issued. This means that if an American-based company chooses to issue eurobonds in Japan in Australian dollars, then these bonds issued will be categorized as euro-AUD bonds.
Issuers of Eurobonds
Eurobonds are issued by a wide variety of entities ranging from international syndicates and private organizations to governments that require foreign-denominated money for certain time frames as they serve as viable means for catering to these needs. Ordinarily, eurobonds are offered with interest rates that are fixed regardless of whether they are issued for long frames of time.
Consider the following example. British company XYZ seeks to enter a new market and aims to do so by setting up a manufacturing unit in Indonesia. Expenses pertaining to this manufacturing unit will need a significant amount of capital to exist in the local currency, in this case, the Indonesian rupiah (or IDR). Owing to the fact that this company is new to Indonesia it might not have sufficient credit within the Indonesian market which can result in high expenses incurred such that local borrowing can take place. Should the company still choose to avail of their funds locally, they may issue a rupiah-denominated eurobond in Britain. Investors who have Indonesian rupiahs in their Britain-based accounts then have the option of availing of these bonds and by doing so they provide company XYZ with a loan based on Indonesian rupiahs.
capital in the local currency. Once the manufacturing unit is operational, proceeds can be used to pay interest to those that hold bonds with the company.
Understanding the Benefits that Eurobonds Provide
Eurobonds provide both issuers as well as investors with a wide range of benefits, the more prominent of which have been briefly touched upon below.
Benefits Derived by Issuers of Eurobonds
Companies that issue eurobonds have the privilege of issuing the same in the country of their choice in addition to the currency of their choice keeping in mind what is most beneficial to their planned usage of these bonds.
Companies are capable of lowering their costs of borrowing by selecting a country that has an interest rate that is favorable to the company’s own at the time of issuance.
Certain investor populations are particularly fond of eurobonds. Take for instance residents of the United Kingdom who have ties to Bangladesh, India and Pakistan often view investments made in these countries with appreciation.
Forex risks reduce with the aid of eurobonds.
While eurobonds might be issued within a certain country, their trade takes place on a global scale which can help attract a large number of investors.
Benefits Derived by Investors of Eurobonds
Those that seek to invest in eurobonds open themselves up to diversification with a smaller fraction of risk associated with the same. This is because they are investing in a company that is established, local and has a firm understanding of the markets and prevailing market conditions and seeks to expand its operations into an emerging market of its choice.
While eurobonds are denominated in foreign currencies, they are first made available in countries that have strong currencies. By virtue of this fact, they have a highly liquid state which is viable for local investors.
Those that seek to invest in eurobonds must do their due diligence about the corporation, government, or syndicate issuing the same and must also consider the project for which the funds provided by the investor would be used. Ordinarily, investors may avail of eurobonds owing to their relatively low par value which makes them more affordable and attractive.