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What is Eurobond?

29 Sep 2022 0 COMMENT

A Eurobond is a fixed-income debt instrument that allows entities to raise funds in a foreign currency. It is usually a long-term bond ranging from 5 to 30 years. The word euro stands for the currency in which the bond is denominated and not euro currency in particular. A Eurobond denominated in US dollars is known as a euro-dollar bond, while one denominated in Chinese yuan is known as a euro-yuan bond.

A brief history of the first Eurobond

In 1963, the first Eurobond was issued by Autostrade, a company that developed railroads in Italy. Designed by bankers based in London, the $15 million bond was issued in US dollars instead of the Italian Lira to reduce taxes.

How does Eurobond work?

A Eurobond is issued by organisations that need foreign currency-denominated debt at fixed interest rates. To reach more investors around the globe and avoid regulatory constraints, organisations, such as financial institutions, governments, private entities and global syndicates, issue Eurobonds. The bond is usually issued by the borrowers through an investment bank or other financial institutions. The financial institution is known as the lead manager, who looks after the bond issuance. After the bond issue, the bank acts as the primary paying agent who collects interest and principal from the borrower and disburses them to the investors. A Eurobond can be issued in any country and currency other than the currency native to the issuer’s country. Allowing entities to raise capital in foreign currency at low-interest rates, these bonds are highly liquid and are listed on the stock exchanges. It is to be noted that the Eurobond has no relation to Europe or its currency despite having euro as a prefix.

The entity issuing a Eurobond is free to choose the country depending on its economy and regulations. The bonds are attractive debt instruments due to their low face value or par value which makes them cheaper to buy.

For example, an Indian company wants to expand to foreign markets and plans to set up a factory in the US. For its expansion, the company would need to raise capital in the local currency, like US dollars. However, it cannot access credit in the US as it is a new entrant and lacks credit history there. So, the company would issue US-denominated Eurobonds to raise capital.

Advantages of a Eurobond

Benefits to the issuers

Benefits to the investors

Freedom to issue bonds in desired currency and country

High liquidity for local investors

Allows borrowing funds at low-interest rates

Allows diverse investment options

High liquid assets that can be converted into cash within a year

Less par/face value

Globally tradable with reduced forex risks

Freedom to invest in high-value currencies

Disadvantages of a Eurobond

A Eurobond has certain disadvantages too that are as follows:

No domestic regulation:

A Eurobond is not regulated in the home country, which makes it riskier compared to other debt instruments.

Foreign exchange risks:

As Eurobonds are issued in different countries, they are vulnerable to political or economic risks of each country. They are also vulnerable to exchange rate fluctuations making them riskier than rupee-denominated masala bonds.

High trading costs:

The trading costs of Eurobond are usually higher, and there is a need for a broker.

Indian companies who have issued Eurobonds

As a strategy to diversify exposure to foreign markets and currencies, many Indian companies issued Eurobonds, including Bharti Airtel Limited, ONGC Videsh Ltd, Bharat Petroleum Corp Ltd, Tata International Ltd, Rolta Ltd, etc.

Difference between a Eurobond and a Masala bond

A Eurobond and masala bond is issued outside the native countries, but both are different from each other. A Eurobond is issued in a currency non-native to the issuer’s country, whereas a masala bond is a rupee-denominated bond issued by an Indian company abroad. In other words, the masala bond allows the bond issuer to raise funds from overseas investors in local currency, while Eurobond is issued in a currency other than the issuer’s local currency. In a masala bond, the borrower doesn’t have to worry about rupee depreciation and it involves no currency risk.

Final word

Now you know what is Eurobond and how it works. The external bond is an effective debt instrument that helps investors diversify their portfolios and reduce risks arising from a single currency, country, or asset. A Eurobond is available on global stock exchanges and can be purchased like a regular bond. However, while investing in a Eurobond, one must remember that the instrument is not completely risk-free and can be volatile at times. So, before investing in this type of external bond, the investors should research and evaluate the risks associated with the investment.

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