What are eurobonds?

Eurobonds are debt instruments that are issued and traded in a currency that’s not native to the country it is issued in.

Eurobonds are instruments issued and traded outside the jurisdiction of the currency in which they are denominated. These bonds are typically issued by international corporations, sovereign governments, and supranational organisations and are denominated in major currencies such as the US dollar, Euro, or Japanese yen.

In this article, we’ll get to know this financial instrument better, understand why they’re important in a diversified portfolio, and what kinds of returns they offer.

Understanding eurobonds

Bonds are debt instruments. This means that if you’re buying a bond, you’re investing the debt of someone else. For instance, when the government issues bonds, they’re borrowing your money and issuing you a ‘bond’ promising a certain return structure.

This is also why bonds are called ‘fixed income’ securities, because they entail a fixed set of cash flows that investors receive over a predetermined time period.

Eurobonds are also bonds like these, except they’re typically issued by multinational corporations, sovereign governments, and supranational organisations seeking to raise capital in international markets.

Since these bonds are denominated (or sold) in different internationally accepted currencies like the US dollar, Euro, Japanese yen, or Swiss franc, they provide issuers with access to capital globally. They can raise capital within India, for instance, from investors based in the U.S. simply by issuing bonds denominated in the U.S. dollar.

How do eurobonds work?

Here are some general steps associated with issuing eurobonds:

• A company, government, or supranational organisation decides to raise capital by issuing Eurobonds in a particular currency (e.g., US dollars) in a foreign market (e.g., London).
• The issuer appoints one or more investment banks to facilitate the whole process, both from a fundraising and regulatory point of view. These ‘underwriters’, as they’re called, conduct due diligence, determine the bond’s terms (interest rate, maturity, etc.), and market the bond to potential investors.
• Investors, both retail and institutional, from various countries can buy these bonds.
• The issuer collects the proceeds from this bond sale and traditionally stores this capital outside the currency’s jurisdiction.

Eurobonds are typically listed and traded on international stock exchanges or OTC markets. Major financial centres like London, Luxembourg, or Singapore usually host these bonds instead of the currency’s native country.

Key features of Eurobonds

Here are some things you need to know in specific about eurobonds:

• Market size: The global Eurobond market is massive, estimated to be around $25 trillion as of 2022. Sovereign governments and organisations like the World Bank and European Investment Bank are major issuers of Eurobonds.
• Maturity: Eurobonds usually have medium to long-term maturities ranging from 3 to 30 years, with 5-10 years being most common.
• Interest rates: Since these bonds are usually issued by credible governments and large corporations, they’re usually considered safe investments. Hence, they don’t command returns as high as equity markets do.

The pros and cons of eurobonds

For the issuers

Companies that issue eurobonds have several advantages to issuing this debt. First, they get to raise capital in a country of their choice (often where they are based) even if the host country itself doesn’t have the appetite for this investment.

Companies can also raise capital in their desired currency after considering other benefits like tax rules, current exchange rates, and even currency swap rates. For instance, sometimes it might be more beneficial for a Japanese company to raise money in USD to invest in the US rather than in JPY.

Foreign exchange costs and risks that most international conglomerates have to account for in their financial statements is also sometimes reduced by raising capital in the desired currency. Losses on spreads are also saved, leading to higher profit margins and lower costs of debt.

For investors

Investors who are heavily invested in their own country might face undue volatility in their portfolios if stocks or interest rates are particularly unstable. Exposure to eurobonds might offer diversification as well as potential for higher returns.

Frequently Asked Questions