Eurobond

What Is a Eurobond?

A Eurobond is a debt instrument that's denominated in a currency other than the home currency of the country or market in which it is issued. Eurobonds are frequently grouped together by the currency in which they are denominated, such as eurodollar or Euro-yen bonds. Since Eurobonds are issued in an external currency, they're often called external bonds. Eurobonds are important because they help organizations raise capital while having the flexibility to issue them in another currency.

Issuance of Eurobonds is usually handled by an international syndicate of financial institutions on behalf of the borrower, one of which may underwrite the bond, thus guaranteeing the purchase of the entire issue.

Understanding Eurobonds

The popularity of Eurobonds as a financing tool reflects their high degree of flexibility as they offer issuers the ability to choose the country of issuance based on the regulatory landscape, interest rates, and depth of the market. They are also attractive to investors because they usually have small par values or face values providing a low-cost investment. Eurobonds also have high liquidity, meaning they can be bought and sold easily.

The term Eurobond refers only to the fact the bond is issued outside of the borders of the currency's home country; it does not mean the bond was issued in Europe or denominated in the euro currency. For example, a company can issue a Eurobond denominated in U.S. dollars in Japan.

Background

The first Eurobond was issued in 1963 by Autostrade, the company that ran Italy's national railroads. It was a $15 million eurodollar bond designed by bankers in London, issued at Amsterdam Airport Schiphol and paid in Luxembourg to reduce taxes. It provided European investors with a safe, dollar-denominated investment.

Issuers run the gamut from multinational corporations to sovereign governments and supranational organizations. The size of a single bond issuance can be well over a billion dollars, and maturities are between five and 30 years, although the largest portion has a maturity of fewer than 10 years. Eurobonds are especially attractive to issuers based in countries that do not have a large capital market while offering diversification to investors.

Delivery

The earliest Eurobonds were physically delivered to investors. They are issued electronically through a range of services, including the Depository Trust Company (DTC) in the United States and the Certificateless Registry for Electronic Share Transfer (CREST) in the United Kingdom. Eurobonds are usually issued in bearer form, which makes it easier for investors to avoid regulations and taxes. Bearer form means the bond isn't registered and as a result, there's no record of ownership. Instead, physical possession of the bond is the only evidence of ownership. 

Market Size

The global bond market totals over $100 trillion in outstanding debt. The fact many Eurobonds are unregistered, and trade-in bearer form makes definitive numbers for the sector impossible to obtain, but it is likely they account for about 30% of the total. A growing portion of Eurobond issuance is from emerging market nations, with both governments and companies seeking deeper and more developed markets in which to borrow.