Eurobonds - what is it? Who issues Eurobonds and why are they needed?

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

In the long-term securities market there is a special type of debt called Eurobonds. The borrowers for them are governments, large corporations, international organizations and some other institutions interested in attracting financial resources for a sufficiently long period and at the lowest cost. For the first time, these instruments appeared in Europe and were called eurobond, which is why today they are often called "eurobonds". What are these bonds, how are they issued, and what advantages do they give to each participant in this market? We will try to cover the answers to these questions in detail and clearly in the article.

The concept and main characteristics of Eurobonds

In simple terms, we can say that these are bonds issued in a currency other than the national currencies of the lender and the borrower, and placed simultaneously on the markets of several countries (except for the issuing country). They are intended, as a rule, to raise funds for a long period of time.term - up to 40 years. There are also short-term Eurobonds issued for a year or three or five, and medium-term - for a period of ten years or more.

Eurobond market participants

There are special institutions that place Eurobonds. What are these structures? This is an international syndicate of underwriters, which includes financial institutions from different countries. At the same time, their issue and turnover are regulated in a limited manner by national legislation. There are also issuers (governments, international and national structures) and investors (financial structures - insurance companies, pension funds, etc.). All participants are members of the International Capital Market Association (ICMA), a self-regulatory organization based in Zurich. Clearstream and Euroclear are used as depository clearing systems.

There is a special Directive of the Commission of the European Communities, which gives a complete official definition of this instrument, regulates the rules and procedures for offering emissions on the market. According to it, Eurobonds are traded securities that have a number of features:

• necessity for them to go through the underwriting procedure and their placement through a syndicate, at least two of whose members belong to different states;
• their offer is carried out in large volumes in the markets of several countries (but not in the country of issuer);
• Purchased initially through a credit institution or other approved financial institution.

PropertiesEurobonds

Eurobonds - what are these papers and what are their characteristic features? First, each Eurobond has a coupon that gives the investor the right to receive interest on the bonds within a certain period of time. Secondly, the interest rate can be either fixed or floating (depending on various factors). Thirdly, the payment of prescribed interest may be made in a currency other than that in which the loan was taken. This is called double denomination. In addition, it is important to know a number of other features of such securities, namely:

• these are bearer securities;
• are placed simultaneously on several markets;
• issued for a long period - usually 10-30 years (up to 40 inclusive);
• the currency in which the loan is raised is foreign for both the issuer and the investor;
• Eurobond face value has dollar equivalent;
• Pay interest on coupons without withholding tax;
• Eurobonds are placed by an issue syndicate, which includes banks, brokerage and investment companies from a number of countries.

Eurobonds are one of the most reliable financial instruments, and therefore their buyers are usually such financial institutions as investment companies, pension funds, insurance companies.

History of emergence and development of the Eurobond market

Issuance of Eurobonds according to the classical placement scheme was first carried out in Italy in 1963. The issuer wasstate road construction company Autostrade. 60,000 bonds with par value of $250 each were placed. It is precisely because Eurobonds originally appeared in Europe, and to this day the bulk of their trading is carried out there, that the name of the paper has the prefix "euro". Today it is more a tribute to tradition than a real characteristic of the instrument.

Active development of this market took place in the 80s. At that time, bearer Eurobonds were especially popular. Later, in the 1990s, they were "oppressed" by euronotes - medium-term registered bonds issued by developed countries and having (unlike eurobonds) collateral. This was due to the growth of market capitalization and the strengthening of the status of the main borrowers. Then their share in the total issue of Eurobonds reached 60%.

At the end of the 20th century, large bond issues called "jumbo" appeared on the market. The liquidity of Eurobonds has increased, and the largest borrowers represented by US government agencies and national entities have increased interest in this financial instrument. In addition, due to the global crisis and the default on government loans in a number of South American countries, the role of bonded loans compared to bank loans has increased. A so-called "flight to quality" process has taken place, where investors prefer safe investments over high-yield investments with a fairly serious risk.

Eurobonds today

OnToday, Eurobonds are in no less demand. The main purpose of issuers entering this market is to search for alternative sources of financial resources (along with traditional domestic, in particular, bank loans), as well as to diversify loans. In addition, there are a number of advantages that Eurobonds have. What are these "profits"? First, cost savings due to capital raising (can reach 20%). Secondly, there are fewer legal formalities and obligations assumed by the issuer. Thirdly, there are practically no restrictions on the directions and forms of use of funds, market flexibility, etc.

Issue and circulation of Eurobonds

There are various options for placing Eurobonds, the most common is an open subscription. It is carried out through a syndicate of underwriters, and the issues are listed on the stock exchange. After the initial sale, they are "thrown" by dealers to the secondary market, where they can be purchased by phone and via the Internet from investment companies. Like any investment instrument, Eurobonds have quotes and yields that depend on supply and demand in the market. However, there is another issue option - limited placement among a certain circle of investors. In this case, the bonds are not traded on the exchange (do not have a listing).

Russian Eurobonds: current situation

For the first time our country entered the international Eurobond market in 1996. The first issues of this type of debtcarried out during 96-97 years. Then the right to place them, subject to a number of conditions, was given to two subjects of the federation - Moscow and St. Petersburg. Today, the participants in this market are the country's largest corporations: Gazprom, Lukoil, Norilsk Nickel, Transneft, Russian Post, MTS, Megafon. Eurobonds of Sberbank, VTB and Gazprombank, Alfa-Bank, Rosbank and others also play a significant role. It is important to note that entry into the Eurobond market for Russian companies is limited by national legislation. Thus, joint-stock companies can raise financing using this instrument in an amount not exceeding the amount of their authorized capital. There are also restrictions on the issuance of unsecured Eurobonds (collateral is usually required) and other rules. You can find out the reliability of Russian issuers from the data of specialized rating agencies such as Moody's, Standard&Poor's and others.

Russia is annually present on the international borrowing market. Despite the fact that the country has enough of its own sources of funding, according to the Minister of Finance, this is an important event in the framework of Russian budget policy. In 2014, one or two exits to the foreign market with Eurobonds in dollars and euros with a total volume of $7 billion (presumably) are planned.

Ukrainian Eurobonds: buy and burn out

Russia participates inthis system not only as an issuer, but also as an investor. In December last year, Russia bought Ukraine's Eurobonds for a total of $3 billion, becoming the sole buyer of this issue. However, such an investment may not turn out well for the country. Since February of this year, S&P and Fitch have repeatedly downgraded Ukrainian Eurobonds. What does this mean? The rating of bonds reached the level of CCC (pre-default), their value on the market decreased, and the probability of default on them increased. At the same time, Russia may demand early repayment of the debt, but its position on this issue is weak. Due to the negative trends in the Ukrainian economy, it will not be easy for the Russian Federation to prove that it did not suspect the possibility of a default, the risks of which were spelled out in a 200-page prospectus. Ukraine's refusal to meet its obligations has very unpleasant consequences for the country itself, associated with the deterioration of the credit history in the international market, the seizure of the property of holders of its securities abroad and the inability to enter the Eurobond debt market for a long time. Therefore, in the interests of both parties, a positive resolution of the issue of bonded debt.

Conclusion

Thus, Eurobonds are very reliable, as a rule, long-term investment instruments that allow attracting financing on the international capital market. They are placed through specially created syndicates and are regulated by supranational structures. Rating agencies play an important role in the Eurobond market.determine the reliability of financial instruments of a particular country. Today, Russia is an active participant in the international Eurobond market, acting on it as an issuer and investor.