What Are Eurobonds?
Definition & Example of Eurobonds
Eurobonds are debt instruments issued in a currency that is not native to the country where they are issued.
What Are Eurobonds?
Euroyen and eurodollar bonds, for example, are denominated in Japanese yen and U.S. dollars, respectively. Most eurobonds are bearer bonds that are electronically traded through clearinghouses, such as Euroclear and Clearstream.
- Alternate name: External bonds
How Eurobonds Work
Here's an example: Imagine that a U.S.-based company wants to expand into India’s market and needs to raise capital to build some physical retail locations.
As the building costs will be incurred in Indian rupees, and the company may not have a credit history in India, it may decide to issue a rupee-denominated bond in the United States.
The company benefits from lower borrowing costs while U.S. investors benefit from unique diversification. These eurobonds have become increasingly popular with the rise in globalization.
The term Eurobond with an upper-case E is different from the term eurobond—the former refers to an unrelated proposal for joint bonds issued by Eurozone countries. As a jointly issued bond, Eurobonds would help lower borrowing costs for weaker members of the Eurozone, such as Italy or Spain.
In 1963, Autostrade, an Italian motorway network, issued 60,000 15-year bearer bonds with a face value of $250 U.S. and a 5.5% annual coupon.
The company chose to issue the bonds in U.S. dollars instead of Italian lira to avoid the interest equalization tax in the United States. The bonds became the world’s first eurobonds, as they were issued in Italy and denominated in U.S. dollars rather than Italian lira.
Many eurobonds have unique nicknames commonly used among traders and investors. For example, the term Samurai bond refers to Japanese yen-denominated eurobonds, while the term Bulldog bond refers to British pound-denominated eurobonds.
It’s important to note that eurobonds aren’t synonymous with foreign bonds. Foreign bonds are bonds that are issued by foreign borrowers in a country’s domestic capital market and denominated in their currency.
However, foreign bonds are underwritten by a domestic banking syndicate in accordance with domestic securities laws, while eurobonds do not involve pre-offering registration or disclosure requirements—hence their bearer bond nature.
Pros and Cons of Eurobonds
Before investing in eurobonds, it's important to consider their benefits and drawbacks, and how international investors can invest in them.
The most attractive benefits of eurobonds, compared to foreign bonds, are the reduced regulatory requirements and greater flexibility.
Eurobond disclosures are governed by market practices rather than an official agency, which enables issuers to avoid regulatory paperwork, reduce costs, and ultimately issue the bonds more quickly. Issuers also have the flexibility of issuing bonds in the country and the currency of their choice.
Unique diversification of investments in other countries
More competitive pricing and liquidity
Lower par value and no automatic withholding of taxes
Increased risk due to no domestic regulation
Investor responsibility for calculating and withholding taxes
Foreign exchange risk, such as an adverse change in the exchange rate before the transaction concludes
For investors, eurobonds offer lower par values and aren’t subject to automatic withholding taxes like many foreign bonds. The bearer bond nature of eurobonds means that companies don’t have to disclose interest payments to tax authorities, which means that it’s up to individuals to declare the income.
Competition is also much greater in the eurobond market than the foreign bond market, which translates to more competitive pricing and liquidity.
The primary drawback of eurobonds is that they’re not regulated by domestic regulators, which could increase their risks. Investors must also handle calculating and withholding taxes on their own rather than having them automatically withheld or reported to tax authorities.
And finally, investors must also factor in any foreign exchange risks associated with the issues, which can be volatile when dealing with emerging or frontier markets.
Investors looking into these bonds should be sure to conduct due diligence to ensure they are comfortable with the terms and risks associated with the bonds.
These bonds should also be included as part of a diversified portfolio to mitigate risks stemming from any single country, currency, or asset class. It’s a good idea to consult with a financial advisor or broker before purchasing eurobonds to fully understand these unique risk factors.
How to Invest in Eurobonds
Eurobonds can be purchased in the same way as most other bonds through global stock exchanges. Currently, the Luxembourg Stock Exchange and the London Stock Exchange are the two biggest hubs for investing in eurobonds, but there are many around the world.
- Eurobonds are international debt instruments issued in a currency that is not that of the country they are issued in.
- They have less regulation and taxes are not automatically withheld.
- They can be purchased through many global stock exchanges.
- It's important to avoid reliance on any one currency.
International Capital Market Associates. "History of the Eurobond market." Accessed Aug. 15, 2020.