Professional Documents
Culture Documents
• This chapter is designed to be useful for the financial officer of a MNC interested in
sourcing new debt capital in the international bond market, as well as for the
international investor interested in international fixed-income securities.
The World’s Bond Markets: A Statistical Perspective
• At year-end 2011, domestic bonds account for 71.7 percent of the total
outstanding bonds. The remaining 28.3 percent are international bonds.
• U.S. dollar, the euro, the pound sterling, and the yen are the four currencies in
which the majority of domestic and international bonds are denominated.
Foreign Bonds and Eurobonds
• The markets for foreign bonds and Eurobonds operate in parallel with the domestic
national bond markets, and all three market groups compete with one another.
• With registered bond, the owner’s name is on the bond and it is also recorded by
the issuer, or else the owner’s name is assigned to a bond serial number recorded
by the issuer.
• Bearer bonds are very attractive to investors desiring privacy and anonymity. One
reason for this is that they enable tax evasion.
Foreign Bonds and Eurobonds
• The expense of the registration process made it more desirable for foreign
borrowers to raise U.S. dollars in the Eurobond market, which, in general, is not
subject to registration under the 1993 act.
Foreign Bonds and Eurobonds
Withholding Taxes
• Prior to 1984, top-quality Eurodollar bonds sold overseas traded at lower yields
than U.S. Treasury bonds of similar maturities that were subject to the withholding
tax.
• Afterward the situation was reversed; foreign investors found the safety of
registered U.S. Treasury bonds without the withholding tax more attractive than
higher yields on corporate Eurodollar bond issues.
Foreign Bonds and Eurobonds
• in 1990, the SEC instituted Rule 144A, which allows qualified institutional buyers
(QIBs) in the United States to trade in private placement issues that do not have to
meet the strict information disclosure requirements of publicly traded issues.
Foreign Bonds and Eurobonds
Global Bonds
• Global bond issues were first offered in 1989.
• A global bond issues is a very large bond issue that would be difficult to sell in any
one country or region of the world.
• Global bonds are fully fungible because the identical instrument trades in all
markets without restriction.
• The average size of global bond issues has been about one billion dollars. Most
have been denominated in U.S. dollars.
Types of Instruments
• During the life of the bond, fixed coupon payments, which are a percentage of the
face value, are paid as interest to the bondholders.
Euro-Medium-Term Notes
• Euro-Medium-Term Notes (Euro-MTNs) are (typically) fixed-rate notes issued by a
corporation with maturities ranging from less than a year to about 10 years.
• Like fixed-rate bonds, Euro-MTNs have a fixed maturity and pay coupon interest on
periodic dates.
• Unlike a bond issue, in which the entire issue is brought to market at once, a Euro-
MTN issue is partially sold on a continuous basis through an issuance facility that
allows the borrower to obtain funds only as need on a flexible basis.
Types of Instruments
Floating-Rate Notes
• The first floating-rate notes were introduced in 1970.
• Floating-rate note (FRNs) are typically medium-term bonds with coupon payment
indexed to some reference rate. Common reference rate are either three-month or
six-month U.S. dollar LIBOR.
• Coupon payments on FRNs are usually quarterly or semiannual and in accord with
the reference rate.
Types of Instruments
Equity-Related Bonds
• There are two types of equity-related bonds:
1. A convertible bond issue allows the investor to exchange the bond for a
predetermined number of equity shares of the issuer.
2. Bond with equity warrants can be viewed as straight fixed-rate bonds with the
addition of a call option (or warrant) feature. The warrant entitles the bondholder
to purchase a certain number of equity shares in the issuer at a prestated price
over a predetermined period of time.
Types of Instruments
Dual-Currency Bonds
• Dual-currency bonds became popular in the mid-1980s.
• A dual-currency bond is a straight fixed-rate bond issued in one currency, say, Swiss
francs, that pays coupon interest in that same currency.
• At maturity, the principal is repaid in another currency, say, U.S. dollars. The
amount of the dollar principal repayment at maturity is set at inception; frequently,
the amount allows for some appreciation in the exchange rate of the stronger
currency.
Currency Distribution, Nationality, and Type of Issuer
• Euro, U.S. dollar, British pound sterling, yen, Swiss franc, and Canadian dollar have
been the most frequently used currencies to denominate issues.
• United States, Germany, the United Kingdom, France, and the Netherlands have
been the major issuers of international bonds during the past several years.
• Fitch Ratings, Moody’s Investors Service, and Standard & Poor’s (S&P) have for
years provided credit ratings on domestic and international bonds and their issuers.
• These three credit-rating organizations classify bond issues into categories based
upon the creditworthiness of the borrower.
• The ratings are based on an analysis of current information regarding the likelihood
of default and the specifics of the debt obligations. The ratings reflect both
creditworthiness and exchange rate uncertainty.
Eurobond Market Structure and
Practices
Primary Market
• A borrowing desiring to raise funds by issuing Eurobonds to the investing public will
contact an investment banker and ask it to serve as the lead manager of an
underwriting syndicate that will bring the bonds to market.
• The lead manager will sometimes invite co-managers to from a managing group to
help negotiate terms with the borrower, ascertain market conditions, and manage
the issuance.
• The managing group, along with other banks, will serve as underwriters for the
issue, that is, they will commit their own capital to buy the issue from the borrower
at a discount from the issue price.
• Most of the underwriters, along with other banks, will be part of a selling group
that sells the bonds to the investing public.
Eurobond Market Structure and
Practices
Secondary Market
• Eurobonds initially purchase in the primary market from a member of the selling
group may be resold prior to their maturities to other investors in the secondary
market.
• Each clearing system has a group of depository banks that physically store bond
certificates. Members of either system hold cash and bond accounts. When a
transaction is conducted, electronic boon entries are made that transfer book
ownership of the bond certificates from the seller to the buyer and transfer funds
from the purchaser’s cash account to the seller’s.
International Bond Market Indexes
• There are several international market indexes. Some of the best known are the
indexes produced by J.P Morgan.
• Their developed market indexes include the J.P. Morgan Government Bond Index
series and the Economic and Monetary Union (EMU) Government Bond Index.
• They also produce the Government Bond Index-Emerging Markets and the
Corporate Emerging Markets Bond Index that tract bond issuance in emerging
market countries.