Eurobond – How Does a Eurobond Work?

Eurobonds are commercial bonds that are issued in a currency other than the home currency of the issuer. The bond can be issued in the same country or a foreign country. However, the currency of the bond will be different from the issuer’s base currency.

The term “euro” in the name does not specify the fact that these bonds are issued within the Eurozone or in Euro currency.

Deeper Definition

A Eurobond is a commercial bond that is issued in a foreign currency other than the home currency of the issuer’s market or country. If the bond is issued in Yen, it can be termed as EuroYen bond. These bonds act as fixed income debt instruments like other bonds.

Eurobonds are also called external bonds since they are issued in an external currency. These bonds can help issuers obtain capital in foreign currencies and foreign countries for overseas projects.

How Does a Eurobond Work?

When large companies enter overseas markets, they need to arrange the financing locally. For a new entrant, the access to local capital market can be hard. They solve the issue for these new entrants.

Eurobonds are issued through banks, private investment companies, or syndicates on behalf of the borrowers. It means the issuer takes all the risks associated with Eurobonds. However, the issuers assess the creditworthiness of the borrower as with any other borrowing.

Eurobonds are issued in a foreign currency other than the issuer’s local currency. For instance, a US–based company wanting to raise capital in Japan may issue a EuroYen bond to raise capital for its project funding in Japan.

READ:  Collateralized Debt Obligations – CDOs: What is It and How It Work?

The use of foreign currency attracts investors as it can mitigate the currency conversion risk. These bonds also come with small face values as compared to other types of bonds, which makes an attractive small investment option. However, the total value of a Eurobond may range in several billion.

Eurobonds also reduce liquidity risk for investors. These bonds are offered in foreign currency by companies with the highest credit ratings. Hence, the demand for these bonds always makes them highly liquid debt instruments.

Special Considerations with Eurobonds

The borrowers can use banks or private companies to issue Eurobonds on their behalf. They have the option of choosing the right country or market with the right interest rates.

Although they are issued in a foreign currency, they can be issued in the native country of the issuer. In fact, Eurobonds are considered prime value debt instruments as they are issued in countries with strong regulations such as the US.

A key fact with these bonds is the feature that these instruments can be held as bearer form. It means the investors do not need to register for investing in these bonds. This feature also reduces the tax liability of the investors. It also reduces the legal paperwork for bond issuers. As a result, Eurobonds reduce the cost of borrowings for the issuers too.

Example

For instance, a US-based company enters the Japanese market for construction projects. It needs to raise financing in Japan. However, lack of creditability in the local market makes it difficult to raise financing in Japan.

READ:  Extendable Reset Bonds: Definition and How It Works

The company can issue Eurobonds denominated in Japanese Yen in the US. Investors in the US with Yen can invest in the EuroYen bond. The company can transfer the proceeds collected in Yen to its local subsidiary in Japan. It reduces the borrowings costs, interest rate risks, and currency risks for the subsidiary company in Japan.

Advantages of Eurobonds

Eurobonds offer several advantages to investors and borrowers alike.

  • Issuers can raise capital in foreign markets and reduce costs of borrowing in the foreign markets.
  • Issuers can mitigate the interest rate and currency conversion risks in foreign countries.
  • These bonds are unique diversification investment instruments for investors.
  • Eurobonds offer tax benefits to investors as well.
  • These bonds help companies expand internationally.
  • The Issuers require less paperwork with Eurobonds, which reduces the tax liability for investors as well.
  • These bonds are issued in global markets that make them highly liquid debt instruments.

Disadvantages of the Eurobonds

Eurobonds come with definite benefits yet they offer some limitations as well.

  • These bonds can face regulatory risks for investors.
  • These bonds can carry adverse forex risks for investors and issuers alike.
  • The bonds can be issued by large institutes, governments, and syndicates with established credit ratings.
  • Investors may require to invest in different currency Eurobonds to diversify the forex risks.
  • Investors are responsible for withholding tax calculations in many jurisdictions by themselves.

Conclusion

Eurobonds are debt instruments to raise capital in foreign currencies other than that of the issuer’s local currency. These bonds are highly liquid investment instruments. Eurobonds help companies raise capital with lower borrowing costs and fewer regulatory restrictions. Investors can diversify their investments through Eurobond investments.

Scroll to Top