What is euro bond?

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.

Mechanism of Euro Bond Market

Euro Bond issue is one denominated in a particular currency but sold to investors in
national capital markets other than the country that issued the denominating currency. An
example is a Dutch borrower issuing DM-denominated bonds to investors in the UK,
Switzerland and the Netherlands.

The Eurobond market is the largest international bond market, which is said to have
originated in 1963 with an issue of Eurodollar bonds by Autostrade, an Italian borrower.
The market has since grown enormously in size and was worth about $ 428 billion in
1994.

Eurobond markets in all currencies except the Japanese Yen are quite free from any
regulation by the respective governments.

Straight bonds are priced with reference to a benchmark, typically treasury issues. Thus a
Eurodollar bond will be priced to a yield a YTM (Yield-to-Maturity) somewhat above the
US treasury bonds of similar maturity, the spread depending upon the borrowers ratings
and market conditions.

Floatation costs of the Eurobond are comparatively higher than costs indicated with
syndicated Eurocredits.

Primary market: A borrower desiring to raise funds by issuing Euro bonds to the
investing public will contact an investment banker and ask it to serve as lead manager of
an underwriting syndicate that will bring the bonds to market. The underwriting syndicate
is a group of investment banks, merchant banks, and the merchant banking arms of
commercial banks that specialize in some phase of public issuance. The lead manager
will usually invite co managers to form a managing group to help negotiate terms with
the borrower, ascertain market conditions and manage the issuance.

The managing group along with other banks, will serve as underwriters for the issue, that
is, they will commit their own capital to buy the issue from the borrower at a discount
from the issue price, if they are unable to place the bonds with investors. The discount or
the underwriting spread is typically in the 2 or 2.5% range. Most of the underwriters
along with other banks will be a part of the placement or selling group that sells the
bonds to the investing public.

The total elapsed time from the decision date of the borrower to issue Eurobonds until net
proceeds from the sale are received is typically 5 to 6 weeks.

The lead manager prepares a preliminary prospectus focusing on economic and financial
characteristics of the project and financial standing of the borrower.

After having consulted a certain number of banks, the lead manager decides on the
interest rate. Subsequently, the issue price is fixed. Clauses of reimbursement before
maturity are provided for. After, the issue advertising is done in International Press in the
form of tombstone. This tombstone indicates the lead manager, co-lead managers and
members of the guarantee syndicate.

Secondary Market: Eurobonds purchased in the primary market can be resold before
their maturities in the secondary market. The secondary market is an over the counter
market with principal trading in London. However, important trading is also done in
other major European cities. The bonds are quoted in percentage of their value, without
taking into account the coupon already running.

The secondary market comprises of market makers and brokers. Market makers stand
ready to buy or sell for their own account by quoting a two way bid and ask prices.
Market traders trade directly with one another, through a broker, or with retail customers.
The bid-ask is their only profit. Brokers accept buy or sell orders from market makers and
then attempt to find a matching party for the other side of the trade; they may also trade
for their own account. Brokers charge a small commission to the market makers that
engaged them. They do not deal directly with retail clients.

Extra Information
What is a bond?
A bond is a loan and you are the lender. The borrower is usually the government, a state,
a local municipality or a big company like General Motors. All of these entities need
money to operate -- to fund the federal deficit, for instance, or to build roads and finance
factories -- so they borrow capital from the public by issuing bonds.

When a bond is issued, the price you pay is known as its "face value." Once you buy it,
the issuer promises to pay you back on a particular day -- the "maturity date" -- at a
predetermined rate of interest -- the "coupon." Say, for instance, you buy a bond with a
$1,000 face value, a 5% coupon and a 10-year maturity. You would collect interest
payments totaling $50 in each of those 10 years. When the decade was up, you'd get back
your $1,000 and walk away.
A key difference between stocks and bonds is that stocks make no promises about
dividends or returns. General Electric's dividend may be as regular as a heartbeat, but the
company is under no obligation to pay it. And while GE stock spends most of its time
moving upward, it has been known to spend months -- even years -- going the other way.

When GE issues a bond, however, the company guarantees to pay back your principal
(the face value) plus interest. If you buy the bond and hold it to maturity, you know
exactly how much you're going to get back (in most cases, anyway). That's why bonds
are also known as "fixed-income" investments -- they assure you a steady payout or
yearly income. And although they can carry plenty of risk, this regular income is what
makes them inherently less volatile than stocks.

Global Bond: They have a minimum value of $1 billion and are effected simultaneously
in Europe, America and Asia. The salient features of these bonds are that they permit to
raise very high amounts. They offer very high liquidity since they are quoted on several
exchanges while secondary market functions round the clock, with uniform price all over
the world. They are especially used by governments, public enterprises, international
organisations and private financial institutions.

External Bond Market: The external bond market refers to bond trading activity
wherein the bonds are underwritten by an international syndicate, are offered in several
countries simultaneously, are issued outside any country's jurisdiction, and are not
registered. The Eurobond market is a major external bond market. The external bond
market combined with the internal bond market comprises the global bond market.
Examples of an external bond are the "global bond," issued by the World Bank, and
Eurodollar bonds.

Internal Bond Market: The internal bond market refers to all bond trading activity in a
given country and is comprised of both a domestic bond market and a foreign bond
market. Also referred to as the "national bond market." The internal and external bond
markets comprise the global bond market

Bulldog Bonds: A sterling denominated foreign bond, priced with reference to the UK
gilts.

Rembrandt Bond: Denominated in the Dutch guilder.

Distinction between Euro Credit and Euro Bond Market

Both Euro bonds and Euro credit (Euro currency) financing have their advantages and
disadvantages. For a given company, under specific circumstances, one method of
financing may be preferred to the other. The major differences are:

1. Cost of borrowing
Euro bonds are issued in both fixed rate and floating rate forms. Fixed rate bonds are an
attractive exposure management tool since the known long-term currency inflows can be
offset by the known long-term outflows in the same currency. In contrast, Euro currency
loans carry variable rates.

2. Maturity
Euro bonds have longer maturities while the period of borrowing in the Euro currency
market has tended to lengthen over time.

3. Size of the issue

Earlier, the funds available for lending at any time have been much more in the inter-
bank market than in the bond market. But of late, this situation does not hold true.
Moreover, although in the past the flotation costs of a Euro currency loan have been
much lower than a Euro bond (about 0.5 % of the total loan amount versus about 2.25 %
of the face value of a Euro bond issue), compensation has worked to lower Euro bond
flotation costs.

4. Flexibility
In a Euro bond issue, the funds must be drawn in one sum on a fixed date and repaid
according to a fixed schedule, unless the borrower pays a substantial prepayment penalty.
By contrast, the drawdown in a floating rate loan can be staggered to suit the borrower’s
needs and can be repaid in whole or in part at any time, often without penalty. Moreover,
a Euro currency loan with a multi-currency clause enables the borrower to switch
currencies on any roll-over date, whereas switching the denomination of a Euro bond
from currency A to currency B would require a costly, combined, refunding and reissuing
operation.

5. Speed
Funds can be raised by a known borrower very quickly in the Euro currency market.
Often, a period of two to three weeks should suffice. A Euro bond financing generally
takes more time, though the difference is becoming less significant.

Why a Company Might Issue a Eurobond

Many major MNCs, (for example, Wal-Mart) that want to expand to another market on a
large scale (say, Thailand) would need plenty of that country's currency (in this example,
Thai baht) and plenty of time in order to reach their goal. In order to contain interest
costs, borrowing should be done at a fixed interest rate. The solution, in this example,
would be for Wal-Mart is to issue a eurobond denominated in Thai baht.

However, the subsidiary, set up in Thailand to manage the operations, is unlikely to have
the necessary borrowing reputation directly in the eurobond market, and would likely ask
its U.S. parent, which would have a good credit rating, to issue the eurobond instead. The
proceeds would then be passed through as an internal loan to the subsidiary, and
denominated in Thai baht.
The Thai baht would be provided to the parent by investors who have Thai baht in
accounts at banks outside of Thailand. In return, investors receive a eurobond and
coupons in pre-determined increments, and at a fixed interest rate.

If the Thai subsidiary grows according to plan, it will generate earnings, which will be
used to pay its loan interest to the parent. The parent then uses these receipts to meet its
obligations to pay interest on the Thai eurobond. Bond principal is usually not paid until
maturity, either from the sale of the Wal-Mart expansion stores to another company or by
issuing another eurobond.

Risk Reduction
By issuing the eurobond in Thai baht the U.S.-based parent does not have currency risk
because its Thai baht liability (the bond) is offset by a Thai baht asset (its internal
loan). Similarly, the Thai subsidiary's liability to pay interest in Thai baht to its parent is
matched by Thai baht income from its local superstores.

As an alternative to issuing in a foreign currency, some MNCs issue a bond in another

currency, and then use currency and interest rate swaps to convert the currency and
interest rate basis into the desired form. The exchange then provides the protection
against currency and interest rate mismatches.

MNCs often use this alternative method, depending on their reputation in certain
currency types, and are able to issue at a lower cost. (Readers unfamiliar with swaps
should refer to An Introduction To Swaps.)

How MNCs Issue Eurobonds

To increase investor interest, a MNC can have its eurobond issue underwritten by a bank,
which obligates those banks to provide any shortcoming in principal. In addition, banks
are paid fees to distribute the eurobonds to investors, to attend road shows to generate
investor interest and to prepare an information memorandum and prospectus, setting out
details of the eurobond, the MNC and the purpose for the funds.

Conclusion
Eurobonds provide MNCs with simplified international operations. Though new
obstacles arise, the advantages far outweigh the reliance on third-party entities for smooth
transactions. Because the eurobond market is restricted to large well-known and reputable
MNCs and other issuers, investors tend to accept less strict covenants and do not require
security.