Eurobonds: A Comprehensive Guide to Foreign Currency Debt

A Eurobond is a fixed-income debt instrument (security) denominated in a different currency than the local one of the country where the bond’s been issued. Hence, it is a unique type of bond.

Eurobonds allow corporations to raise funds by issuing bonds in a foreign currency. The bonds are also called external bonds because they can be originated in a foreign currency (external currency).

If a Eurobond is denominated in US dollars, then it can be called a euro-dollar bond. If it is denominated in Chinese yuan, then this would be named euro-yuan bond.

How Do Eurobonds Work?

The essence of Eurobonds is that a company can choose any country to issue bonds depending on its economic and regulatory environment (e.g., interest rates in the country, economic cycle, market sizes, etc.). What makes the bonds attractive among investors is a small notional amount of a bond (face value or par valuePar ValuePar Value is the nominal or face value of a bond, or stock, or coupon as indicated on a bond or stock certificate. It is a static value), which means that the bond is relatively cheap to obtain.

Importantly, Eurobonds are highly liquid and can be converted into cash within one fiscal year.

The categorization of Eurobonds is dependent on the currency in which the bonds were issued. If a US-based company decides to release Eurobonds in China in British pounds, then the bonds will be categorized as euro-pound bonds.

How is a Eurobond Issued?

Typically, financial institutions, such as investment banks, issue bonds on behalf of the borrower. If a bank will be responsible for the underwriting process, it implies a guarantee to the borrower that the whole bond issue will be sold in the primary market during the initial debt offering process.

Please note that the term “Eurobond” refers only to the fact that the bond was issued in a different country and currency. It does not need to be a country in Europe. It can be whatever country in the world.

For example, Eurobonds can be issued in China and denominated in US dollars.

Eurobonds are issued by many institutions, such as:

• Corporations
• Governments
• SyndicatesSyndicateA syndicate is an organized group of just about anything - corporations, other entities, or even individuals. The group is organized independently by the entities that form it. A syndicate’s primary notable quality is that the groups within it work together to conduct some type of business in order to pursue and promote their collective interests.

The primary reason for issuing Eurobonds is a need for foreign currency capital. Since the bonds are fixed-income securities; they usually offer a fixed interest rate to investors.

Imagine, as an example, a US company aims to permeate into a new market and plans to erect a large factory, say, in China. The company will need to invest large sums of money in local currency – the Chinese yuan. As the company is a new entrant to the Chinese market, it may lack access to credit in China.

The company decides to go with yuan-denominated Eurobonds in the United States. Investors who hold yuan in their accounts will invest in the bonds, which will provide funds to a new facility in China. If a new factory is profitable, the cash flow will go to settling the interest to US-based bondholders.

Benefits to Issuers

A list of benefits to Eurobond issuers consists of the following:

1. Flexibility to choose a favorable country to originate bonds and currency
2. A country choice with lower interest rates
3. Avoidance of currency riskCurrency RiskCurrency risk, or exchange rate risk, refers to the exposure faced by investors or companies that operate across different countries, in regard to unpredictable gains or losses due to changes in the value of one currency in relation to another currency. or forex risk by using Eurobonds
4. Access to a huge range of bond maturity periods that can be chosen by the issuer
5. International bond trade despite being issued in a certain country that broadens potential investor base

Benefits to Investors

The main benefit to local investors in purchasing a Eurobond is that it provides exposure to foreign investments staying in the home country. It also gives a sense of diversificationDiversificationDiversification is a technique of allocating portfolio resources or capital to a variety of investments.The goal of diversification is to mitigate losses, spreading out the risks.

As mentioned previously, Eurobonds are pretty cheap, with a small face value and are highly liquid.

If a Eurobond is denominated in a foreign currency and issued in a country with a strong economy (and currency), then the bond liquidity rises.

Related Readings

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To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

• Bond RatingsBond RatingsBond ratings are representations of the creditworthiness of corporate or government bonds. The ratings are published by credit rating agencies and provide evaluations of a bond issuer’s financial strength and capacity to repay the bond’s principal and interest according to the contract.
• International BondsInternational BondsInternational bonds are bonds issued by a country or company that is not domestic for the investor. Such bonds help a company can reach more investors.
• Primary MarketPrimary MarketThe primary market is the financial market where new securities are issued and become available for trading by individuals and institutions. The trading activities of the capital markets are separated into the primary market and secondary market.
• Yield CurveYield CurveThe Yield Curve is a graphical representation of the interest rates on debt for a range of maturities. It shows the yield an investor is expecting to earn if he lends his money for a given period of time.  The graph displays a bond's yield on the vertical axis and the time to maturity across the horizontal axis.