IBCM Lecture 4: Eurobond Markets - An Offshore Financing Solution, Study Guides, Projects, Research of Finance

Download IBCM Lecture 4: Eurobond Markets - An Offshore Financing Solution and more Study Guides, Projects, Research Finance in PDF only on Docsity! IBCM LECTURE 4 01 March 2010 EUROBOND MARKE TS IBCM LECTURE 4: EUROBOND MARKETS Definition ? A long-term debt instrument issued in a currency other than that of the currency of the country of issue e.g. UK energy company issues a Eurobond in USD in Luxembourg which is to finance oil exploration in India IBCM LECTURE 4: EUROBOND MARKETS Format s y Straights - fixed rates with fixed redemption y FRNs and VRNs - floating rate & variable rate notes y Subordinated issues - bonds where the issued to eurozone residents it is a “euro-denominated domestic bond”) y In USD to non-US residents y In GBP to non-UK investors IBCM LECTURE 4: EUROBOND MARKETS Origins & history 1. The market had its origins in US restrictions: y President Kennedy’s interest equalisation tax (ended 1974) y President Johnson’s restrictionson corporate capita l investments – unless matched with F X inflows (ended 1984) 2. First USD Eurobond in 1957 3. First ECU Eurobond in 1961 4. Main issue locations London and Luxembourg IBCM LECTURE 4: EUROBOND MARKETS Characteristics & structure of Eurobonds The Eurobond can be characterised as a financial security that is typified by: y A minimum of regulation y Lower issuing costs than domestic bonds y No requirement to be rated (although Eurobonds inevitably are) y Being listed on a public market (due to the requirement for insurance companies and consumer-oriented funds to hold the majority of assets in publicly listed securities) y Speed of issuing process IBCM LECTURE 4: EUROBOND MARKETS The concept of the private placement A major advantage that Eurobonds have over traditional domestic and foreign bonds, is that they are a private placement facility which is: 1. Not publicly advertised y Intermediary – single agent or a panel of agents managing various aspects (legal/regulatory, fiscal, structure, marketing) y Investor – either institutional who will tend to buy for trading OR retail who will hold as an investment (e.g. a pension fund) IBCM LECTURE 4: EUROBOND MARKETS Risk issues for manager/ agent For the manager the primary risks are: y Price at the point of sale may not be the prospectus price which the sales team indicated to the market y Sales of bonds may fail to achieve the expected level and the underwriter is required to buy the unsold balance Such risks could be driven by: y Change in credit rating y Change in the perceived evaluation of the issuer by the market or by analysts y Shift in investor sentiment (e.g. equities become suddenly attractive) y Changes in macro-economic fundamentals y Rise in interest rates IBCM LECTURE 4: EUROBOND MARKETS Issue & trading y The Eurobond a tradable instrument up to maturity y Issuance generally in London or Luxembourg with secondary trading and electronic settlement through Euroclear and Clearstream y No central register where holders of any issue are named y Eurobonds are listed on a number of stock exchanges London, Luxemburg are most frequently used, but Singapore is developing as a market y Increasing use of Eurobonds by emerging economy or transition economy countries – especially energy companies (note recent issue with Ukrainian NaftaGaz Eurobonds) 
 
 IBCM LECTURE 4: EUROBOND MARKETS Taxation, regulation & the future y Eurobonds not subject to withholding tax on interest y Extent to which US market for Eurobonds may be progressively affected by Rule 144a