The name is Bond. Eurobond. No, but seriously, Eurobonds are complex. That's no secret. They make up a significant portion of the financial markets, but they're also the most complicated type of bond with varying levels of risk and duration.
In this article, we will be explaining what are Eurobonds, who issues them, and the reasons for issuance.
What are Eurobonds
First of all, on this topic of Eurobonds, and to remove the confusion many might have, some would think that the name "Eurobonds" has some kind of relationship with Europe or the Euro currency, but there is no relation at all, instead, the word "Eurobond" refers to an external currency.
What are Eurobonds then? Eurobonds can be defined as a special type of bond issued in a currency that is different from that of the country or Market in which the bond is issued. Eurobonds are categorized by the currency in which they are denominated.
What does that mean?
For example, a private company can issue a U.S. Dollar-denominated euro-dollar bond in Japan. Let's understand this with the below representation:
As you see, there's a country named Japan and a bond is issued in Japan by a private company and the currency in which the bond is issued is in U.S. Dollar, not in Yen, which means there is a difference in currency and a difference of country's currency, in a country in which the bond is issued.
So, this categorizes this Bond in the currency in which it is nominated. We normally know and call it Eurobond, but as in our example, the currency in which the bond is denominated is the U.S. Dollar, so we call or denote it as a eurodollar Bond, not Euro Bond because the currency in which it is denominated is of dollars.
Who Issues Eurobonds
- Private organizations
- International syndicates
- Governments
Why Issue Eurobonds
Issuers that are in need of foreign borrowings for a specified duration, find Eurobonds as the most suitable option for their needs.
They are usually offered at fixed interest rates, as well as offer a clear fixed payment tax structure.
Let's take the example of Coca-Cola.
Suppose Coca-Cola wants to enter a new market by establishing a large manufacturing facility in China. Obviously, there are some expenses that would require setting up this facility, so there is a need for a large capital budget in their local currency, the Chinese Yuan.
Coca-Cola may not have the necessary Credit in the Chinese market.
The company then has two options to collect Chinese Yuan:
- Source the money locally from China
- Issue a Yuan-denominated Eurobond in the US
Investors, including banks that hold the Yuan currency, which is available in U.S. Based accounts will purchase this Eurobond.
Coca-cola then collects this capital and floats the company in Yuan. The collected capital in Yuan can be given to the local Chinese sovereignty by the U.S.-based parent company. When this company becomes profitable, it will proceed and pay interest to bondholders.
We can conclude that the main reason Eurobonds are issued is to raise capital in a foreign currency.
Benefits of Eurobonds
- Issuer's Freedom. Issuers have the ability to select the currency's nation of origin
- The ability to pick the maturity length of a bond
- No currency risk
- Ease of access to foreign markets
- Attract investors globally
Eurobonds, like other bonds, may be purchased through stock exchanges. The Luxembourg Stock Exchange and the London Stock Exchange are now the major Eurobond centers. Contacting an expert might be advantageous in understanding the special dangers of Eurobonds.
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