Eurobonds, Foreign Bonds, and Sovereign Bonds International bonds can also be classified into three main groups: Eurobonds, foreign bonds, and sovereign bonds
Eurobonds.
Eurobonds.
Eurobonds are long-term bonds issued and sold outside the country of the currency in which they are denominated (e.g., dollar-denominated bonds issued in Europe or Asia). Perhaps confusingly, the term Euro simply implies the bond is issued outside the country in whose currency the bond is denominated. Thus, “Euro”-bonds are issuedin countries outside of Europe and in currencies other than the euro. Indeed, the majority of issues are still in U.S. dollars and can be issued in virtually any region of the world. Eurobonds were first sold in 1963 as a way to avoid taxes and regulation. U.S. corporations were limited by regulations on the amount of funds they could borrow domestically (in the United States) to finance overseas operations, while foreign issues in the United States were subject to a special 30 percent tax on their coupon interest. In 1963, these corporations created the Eurobond, by which bonds were denominated in various currencies and were not directly subject to U.S. regulation. Even when these regulations were abandoned, access to a new and less-regulated market by investors and corporations created sufficient demand and supply for the market to continue to grow.
Eurobonds are generally issued in denominations of $5,000 and $10,000. They pay interest annually using a 360-day year (floating-rate Eurobonds generally pay interest every six months on the basis of a spread over some stated rate, usually the LIBOR rate). Eurobonds are generally bearer bonds and are traded in the over-the-counter markets, mainly in London and Luxembourg. Historically, they have been of interest to smaller investors who want to shield the ownership of securities from the tax authorities. The classic investor is the “Belgian dentist” who would cross the border to Luxembourg on the coupon date to collect his coupons without the knowledge of the Belgian tax authority. However, today small investors of the Belgian dentist type are overshadowed in importance by large investors such as mutual and pension funds. Ratings services such as Moody’s and Standard & Poor’s generally rate Eurobonds. Equity-related Eurobonds are convertible bonds (bonds convertible into equity) or bonds with equity warrants attached
Eurobonds are placed in primary markets by investment banks. Often, a syndicate of investment banks works together to place the Eurobonds. Most Eurobonds are issued via firm commitment offerings, although the spreads in this market are much larger than for domestic bonds because of the need to distribute the bonds across a wide investor base often covering many countries. Thus, the underwriters bear the risk associated with the initial sale of the bonds. The Eurobond issuer chooses the currency in which the bond issue will be denominated. The promised payments of interest and principal must then be paid in this currency. Thus, the choice of currency, and particularly the level and volatility in the interest rates of the country of the currency, affect the overall cost of the Eurobond to the bond issuer and the rate of return to the bond holder.
The full introduction of the euro in 2002 has certainly changed the structure of the Eurobond market. Most obvious is that Eurobonds denominated in the individual European currencies no longer exist but rather are denominated in a single currency, the euro. Further, liquidity created by the consolidation of European currencies allows for the demand and size of euro-denominated Eurobond issues to increase. Such growth was exhibited early in the life of the euro (or the European currency unit [ECU] prior to 2002) as the volume of new Euro debt issues in the first and second quarter of 1999 rose 32 percent and 43 percent, respectively, from the same periods in 1998. In January 1999, a record $415 billion in long-term Eurobonds were issued. In 2000 and 2001, a total of $989.1 billion long-term Eurobonds were issued, and in 2009 over $1.5 trillion of long-term Eurobonds were issued. Finally, Eurobond yields across the European countries should vary only slightly, which should improve euro-denominated securities’ marketability even further.
Foreign Bonds.
Eurobonds are generally issued in denominations of $5,000 and $10,000. They pay interest annually using a 360-day year (floating-rate Eurobonds generally pay interest every six months on the basis of a spread over some stated rate, usually the LIBOR rate). Eurobonds are generally bearer bonds and are traded in the over-the-counter markets, mainly in London and Luxembourg. Historically, they have been of interest to smaller investors who want to shield the ownership of securities from the tax authorities. The classic investor is the “Belgian dentist” who would cross the border to Luxembourg on the coupon date to collect his coupons without the knowledge of the Belgian tax authority. However, today small investors of the Belgian dentist type are overshadowed in importance by large investors such as mutual and pension funds. Ratings services such as Moody’s and Standard & Poor’s generally rate Eurobonds. Equity-related Eurobonds are convertible bonds (bonds convertible into equity) or bonds with equity warrants attached
Eurobonds are placed in primary markets by investment banks. Often, a syndicate of investment banks works together to place the Eurobonds. Most Eurobonds are issued via firm commitment offerings, although the spreads in this market are much larger than for domestic bonds because of the need to distribute the bonds across a wide investor base often covering many countries. Thus, the underwriters bear the risk associated with the initial sale of the bonds. The Eurobond issuer chooses the currency in which the bond issue will be denominated. The promised payments of interest and principal must then be paid in this currency. Thus, the choice of currency, and particularly the level and volatility in the interest rates of the country of the currency, affect the overall cost of the Eurobond to the bond issuer and the rate of return to the bond holder.
The full introduction of the euro in 2002 has certainly changed the structure of the Eurobond market. Most obvious is that Eurobonds denominated in the individual European currencies no longer exist but rather are denominated in a single currency, the euro. Further, liquidity created by the consolidation of European currencies allows for the demand and size of euro-denominated Eurobond issues to increase. Such growth was exhibited early in the life of the euro (or the European currency unit [ECU] prior to 2002) as the volume of new Euro debt issues in the first and second quarter of 1999 rose 32 percent and 43 percent, respectively, from the same periods in 1998. In January 1999, a record $415 billion in long-term Eurobonds were issued. In 2000 and 2001, a total of $989.1 billion long-term Eurobonds were issued, and in 2009 over $1.5 trillion of long-term Eurobonds were issued. Finally, Eurobond yields across the European countries should vary only slightly, which should improve euro-denominated securities’ marketability even further.
Foreign Bonds.
Foreign bonds are long-term bonds issued by firms and governments outside of the issuer’s home country and are usually denominated in the currency of the country in which they are issued rather than in their own domestic currencyfor example, a Japanese company issuing a dollar-denominated public bond rather than a yen-denominated bond in the United States. Foreign bonds were issued long before Eurobonds and, as a result, are frequently called traditional international bonds. Countries sometimes name their foreign bonds to denote the country of origin. For example, foreign bonds issued in the United States are called Yankee bonds, foreign bonds issued in Japan are called Samurai bonds, and foreign bonds issued in the United Kingdom are called Bulldog bonds.
Sovereign Bonds.
Sovereign Bonds.
Sovereign bonds are government-issued debt. Sovereign bonds have historically been issued in foreign currencies, in either U.S. dollars or euros. Lesser developed country (LDC) sovereign debt tends to have a lower credit rating than other sovereign debt because of the increased economic and political risks. Where most developed countries are either AAA- or AA- rated, most LDC issuance is rated below investment grade, although a few countries that have seen significant improvements have been upgraded to BBB or A ratings, and a handful of lower income countries have reached ratings levels equivalent to more developed countries. Accordingly, sovereign bonds require higher interest spreads. For example, sovereign bonds are uncollateralized and their price or value reflects the credit risk rating of the country issuing the bonds. The $2.8 billion June 1997 issue by Brazil of 30-year dollar-denominated bonds (rated BB grade by Standard & Poor’s) was sold at a yield spread of nearly 4 percent over U.S. Treasuries at the time of issue.
In July 2001, Argentinian sovereign bonds were trading at spreads of over 15 percent above U.S. Treasury rates, with the J.P. Morgan Emerging Market Bond Index showing a spread of nearly 10 percent over U.S. Treasuries. This reflected the serious economic problems in Argentina and the contagious effects these were having on other sovereign bond markets. More recently, in September 2008, fears of the global economic crisis and falling commodity prices hit emerging markets particularly hard: the sovereign debt spread jumped from 165 to over 587 basis points in Mexico; from 200 to over 586 basis points in Brazil; from 69 to over 322 basis points in Chile; from over 29 to more than 600 basis points in Colombia; and from 942 and 873 basis points to over 4,019 and 2,325 basis points in Argentina and Venezuela, respectively. By the week of October 24, 2008, spreads had tripled since early August 2008. However, it should also be noted that credit default spreads on 10-year U.S. Treasury debt rose to a record 29.2 basis points. Clearly, developed countries were not immune to the crisis.
Problems with sovereign bonds continued into 2009 and 2010. For example, in November 2009, Dubai World, the finance arm of Dubai, asked creditors for a six-month delay on interest payments due on $60 billion of the country’s debt. In the mid- and late 2000s, Dubai became a center of investment and development, much of it funded by burgeoning oil wealth from neighboring countries. But during the financial crisis, the Middle East nation was hard hit by a falling real estate market. Further, throughout the spring of 2010 Greece struggled with a severe debt crisis. Early on, some of the healthier European countries tried to step in and assist the debt-ridden country. Specifically, in March 2010, a plan led by Germany and France to bail out Greece with as much as $41 billion in aid began to take shape. However, in late April, Greek bond prices dropped dramatically as traders began betting a debt default was inevitable, even if the country received a massive bailout. The selloff was the result of still more bad news for Greece, which showed that the 2009 budget deficit was worse than had been previously reported. As a result, politicians in Germany began to voice opposition to a Greek bailout. Further, Moody’s Investors Service downgraded Greece’s debt rating and warned that additional cuts could be on the way. The problems in the Greek bond market then spread to other European nations with fiscal problems, such as Portugal, Spain, and Italy. As a result, in May, euro-zone countries and the International Monetary Fund, seeking to halt a widening European debt crisis that had threatened the stability of the euro, agreed to extend Greece an unprecedented $147 billion rescue in return for huge budget cuts
Under the doctrine of sovereign-immunity, the repayment of sovereign debt cannot be forced by the creditors and it is thus subject to compulsory rescheduling, interest rate reduction, or even repudiation. The only protection available to creditors is the threat of the loss of credibility and a lowering of the country’s international standing (the sovereign debt rating of the country, which may make it much more difficult to borrow in the future).
In July 2001, Argentinian sovereign bonds were trading at spreads of over 15 percent above U.S. Treasury rates, with the J.P. Morgan Emerging Market Bond Index showing a spread of nearly 10 percent over U.S. Treasuries. This reflected the serious economic problems in Argentina and the contagious effects these were having on other sovereign bond markets. More recently, in September 2008, fears of the global economic crisis and falling commodity prices hit emerging markets particularly hard: the sovereign debt spread jumped from 165 to over 587 basis points in Mexico; from 200 to over 586 basis points in Brazil; from 69 to over 322 basis points in Chile; from over 29 to more than 600 basis points in Colombia; and from 942 and 873 basis points to over 4,019 and 2,325 basis points in Argentina and Venezuela, respectively. By the week of October 24, 2008, spreads had tripled since early August 2008. However, it should also be noted that credit default spreads on 10-year U.S. Treasury debt rose to a record 29.2 basis points. Clearly, developed countries were not immune to the crisis.
Problems with sovereign bonds continued into 2009 and 2010. For example, in November 2009, Dubai World, the finance arm of Dubai, asked creditors for a six-month delay on interest payments due on $60 billion of the country’s debt. In the mid- and late 2000s, Dubai became a center of investment and development, much of it funded by burgeoning oil wealth from neighboring countries. But during the financial crisis, the Middle East nation was hard hit by a falling real estate market. Further, throughout the spring of 2010 Greece struggled with a severe debt crisis. Early on, some of the healthier European countries tried to step in and assist the debt-ridden country. Specifically, in March 2010, a plan led by Germany and France to bail out Greece with as much as $41 billion in aid began to take shape. However, in late April, Greek bond prices dropped dramatically as traders began betting a debt default was inevitable, even if the country received a massive bailout. The selloff was the result of still more bad news for Greece, which showed that the 2009 budget deficit was worse than had been previously reported. As a result, politicians in Germany began to voice opposition to a Greek bailout. Further, Moody’s Investors Service downgraded Greece’s debt rating and warned that additional cuts could be on the way. The problems in the Greek bond market then spread to other European nations with fiscal problems, such as Portugal, Spain, and Italy. As a result, in May, euro-zone countries and the International Monetary Fund, seeking to halt a widening European debt crisis that had threatened the stability of the euro, agreed to extend Greece an unprecedented $147 billion rescue in return for huge budget cuts
Under the doctrine of sovereign-immunity, the repayment of sovereign debt cannot be forced by the creditors and it is thus subject to compulsory rescheduling, interest rate reduction, or even repudiation. The only protection available to creditors is the threat of the loss of credibility and a lowering of the country’s international standing (the sovereign debt rating of the country, which may make it much more difficult to borrow in the future).
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