Eurobonds constitute a major source of borrowing in the Euro-currency market. A bond is a debt security issued by the borrower, Which is purchased by the investor and it involves in the process some intermediaries like underwriters merchant bankers etc. Eurobonds are bonds of international borrowers sold in different markets simultaneously by a group of international banks. The bonds are issued on behalf of governments, big multinational corporations, etc.
Eurobonds are unsecured securities and hence normally issued by Governments, Governmental Corporations, and Local Bodies which are generally guaranteed by the governments of the countries concerned and big multinational borrowers of goods credit rating.
The bonds are sold by a group of international banks, which form a syndicate. The lead banks in the syndicate advises the issuer of the bond on the size of the issue, terms and conditions, timing of the issue etc. And take up the responsibility of coordinating the issue. Lead managers take the assistance of co-managing banks. Each issue is underwritten by a group of underwriters and then is sold.
Types of Eurobonds
- Straight Euro-Bond: These bonds have fixed maturities and carry a fixed rate of interest straight Eurobonds are repaid by amortization or in a lump sum at the maturity date. Straight Euro-bonds are technically unsecured bonds because almost all of them are not secured by any specific property of the borrower. Because of this, bondholders become general creditors in the event of default. The leaders usually look to the nature of the borrower’s assets, its earning power, and its general credit strength.
- Convertible Euro-Bond: These bonds are convertible into parent common stock and have become increasingly popular because the market for straight euro-bonds has weakened. Convertible Euro-bonds provide investors with a steady income and an opportunity to participate in rising stock prices. International investors are inflation-conscious; they prefer convertible euro-bonds which maintain the purchasing power of their money.
- Bond with Warrants: Some Euro-bonds are issued with warrants. A warrant is an option to buy a stated number of common shares at a stated price during a prescribed period. Warrants pay no dividends, have no voting rights, and become worthless at expiration unless the price of the common stock exceeds the exercise price.
- Currency option Bonds/ Multiple Currency-Bonds: Currency option bond allows the bond holder receive the interest payment and the principle in any of the currencies specified in the bond. The bond holder can choose the currency of their coupon and principle from among the two or more currencies specified in the bond at the pre-determined exchange rate.
- Currency Cocktail/ Currency Basket Bonds: Currency basket bonds have been developed to stabilize the purchasing power of the coupon. This is accomplished by combining various currencies as per some weighting process. The amount of each currency in basket generally remains constant but the value of the basket changes, as some of the currencies depreciate or appreciate relative to each other.
- Yankee Bonds: Yankee bonds are a dollar bond issued in U.S by non-U.S borrowers/ companies. It may be any of the above kinds.
- Samurai Bonds: Samurai Bonds is a Yen denominated bond issued in Japan by non-Japanese companies. This bond can also be of any of the above kinds.
- Floating Rate Bonds: These bonds are frequently called Floating-Rate Notes. The rate of return on these notes is adjusted at regular intervals, usually every six months, to reflect changes in short-term market rates.
- Stripped Bonds: These bonds are bearer form bonds, easy to sell. U.S. government first issued these for foreign investors. Treasury regulations permit U.S. corporations to sell bearer bonds to foreign residents. In addition, securities firms may buy U.S. treasury securities, repackage them in trusts, and resell claims on the trust to foreigners in bearer form. These bonds are called stripped bonds.