MOORAD CHOUDHRY, PhD
Head of Treasury, KBC Financial Products, London
Abstract: The integration and globalization of the world's capital markets has been most evident in the Eurobond market. It is an important source of funds for many banks and corporates, as well as sovereign governments. The Eurobond market has benefited from much of the recent advances in financial engineering, and has undergone innovative changes since its inception in the 1960s. It continues to develop new structures, in response to the varying demands and requirements of specific groups of investors. The range of innovations have customized the market to a certain extent and often the market is the only opening for certain types of government and corporate finance. Investors also often look to the Eurobond market due to constraints in their domestic market, and Euro securities have been designed to reproduce the features of instruments that certain investors may be prohibited from investing in their domestic arena. Other instruments are designed for investors in order to provide tax advantages. The key feature of Eurobonds is the way they are issued, internationally across borders and by an international underwriting syndicate. The method of issuing Eurobonds reflects the cross-border nature of the transaction, and unlike government markets where the auction is the primary issue method, Eurobonds are typically issued under a "fixed price reoffer" method or a "bought deal." There is also a regulatory distinction, as no one central authority is responsible for regulating the market and overseeing its structure.
Keywords: bought deal, Clearstream, covenant, Eurobonds, Euroclear, fixed price reoffer scheme, global note, gray market, lead manager, primary market, secondary market, syndicate, trustee, underwriters
This chapter reviews the Eurobond market in terms of the structure of the market, the nature of the instruments themselves, the market players, the issuing process and technical aspects such as taxation and swap arrangements. We also review the secondary market.
A Eurobond is a debt capital market instrument issued in a "Eurocurrency" through a syndicate of issuing banks and securities houses, and distributed internationally when issued, that is sold in more than one country of issue and subsequently traded by market participants in several international financial centers. The Eurobond market is divided into sectors depending on the currency in which the issue is denominated. For example, U.S. dollar Eurobonds are often referred to as Eurodollar bonds, similar sterling issues are called Eurosterling bonds. The prefix "Euro" was first used to refer to deposits of U.S. dollars in continental Europe in the 1960s. The Euro-deposit now refers to any deposit of a currency outside the country of issue of that currency, and is not limited to Europe. For example, a deposit of Singapore dollars in the Dubai branch of Citigroup is a Euro-deposit. For historical reasons and also due to the importance of the U.S. economy and investor base, the major currency in which Eurobonds are denominated has always been U.S. dollars.
The first ever Eurobond is generally considered to be the issue of $15 million nominal of 10-year 5l/2% bonds by Autostrada, the Italian state highway authority, in July 1963. (Decovny [1998, p. 68] states that the first Eurobond issue was in 1957, but its identity is not apparent.) The bonds were denominated in U.S. dollars and paid an annual coupon in July each year. This coincides with the imposition in the United States of the interest equalization tax, a withholding tax on domestic corporate bonds, which is often quoted as being a prime reason behind the establishment of overseas deposits of U.S. dollars.
At this stage it is important to identify "foreign bonds" and distinguish them from Eurobonds. Foreign bonds are debt capital market instruments that are issued by foreign borrowers in the domestic bond market of another country. As such, they trade in a similar fashion to the bond instruments of the domestic market in which they are issued. They are usually underwritten by a single bank or a syndicate of domestic banks, and are denominated in the currency of the market in which they are issued. For those familiar with the sterling markets the best example of a foreign bond is a Bulldog bond, which is a sterling bond issued in the United Kingdom by a non-U.K. domiciled borrower. Other examples are Yankee bonds in the United States, Samurai bonds in Japan, Rembrandt bonds in the Netherlands, Matador bonds in Spain, and so on. Hence, a U.S. company issuing a bond in the United Kingdom, denominated in sterling and underwritten by a domestic bank, would be issuing a Bulldog bond, which would trade as a gilt (a U.K. government security), except with an element of credit risk attached. In today's integrated global markets, however, the distinction is becoming more and more fine. Many foreign bonds pay gross coupons and are issued by a syndicate of international banks, so the difference between them and Eurobond may be completely eroded in the near future.
The most important domestic market for foreign bond issues has been the U.S. dollar market, followed by euros, Swiss francs, and Japanese yen. There are also important markets in Canadian, New Zealand, and Australian dollars, and minor markets in currencies such as Hong Kong dollars, Kuwaiti dinars, and Saudi Arabian riyals.
There is a wide range of instruments issued in the Eurobond market, designed to meet the needs of borrowers and investors. We review the main types in this section.
The most common type of instrument issued in the Euro markets is the conventional vanilla bond, with fixed coupon and maturity date. Coupon frequency is on annual basis. The typical face value of such Eurobonds is $1,000, €1,000, £1000, or so on. The bond is unsecured, and therefore depends on the credit quality of its issuer in order to attract investors. Eurobonds have a typical maturity of 5 to 10 years, although many high-quality corporates have issued bonds with maturities of 30 years or even longer. The largest Eurobond market is in U.S. dollars, followed by issues in euros, Japanese yen, sterling, and a range of other currencies such as Australian, New Zealand, and Canadian dollars; South African rand; and so on. Issuers will denominate bonds in a currency that is attractive to particular investors at the time, and it is common for bonds to be issued in more "exotic" currencies, such as Middle Eastern, Latin American, and Asian currencies.
Eurobonds are not regulated by the country in whose currency the bonds are issued. They are typically registered on a national stock exchange, usually London or Luxembourg. Listing of the bonds enables certain institutional investors, who are prohibited from holding assets that are not listed on an exchange, to purchase them. The volume of trading on a registered stock exchange is negligible, however; virtually all trading is on an over-the-counter (OTC) basis directly between market participants.
Interest payments on Eurobonds are paid gross and are free of any withholding or other taxes. This is one of the main features of Eurobonds, as is the fact that they are "bearer" bonds; that is, there is no central register. Historically, this meant that the bond certificates were bearer certificates with coupons attached; these days, bonds are still designated "bearer" instruments but are held in a central depository to facilitate electronic settlement.
An early innovation in the Eurobond market was the floating-rate note. They are usually short- to medium-dated issues, with interest quoted as a spread to a reference rate. The reference rate is usually the London Interbank Offered Rate (LIBOR), or the Singapore Interbank Offered Rate (SIBOR) for issues in Asia. The euro Interbank Rate (EURIBOR) is also now commonly quoted. The spread over the reference rate is a function of the credit quality of the issuer, and can range from 10 to 20 points over the reference rate for high-quality credits and from 150 to 450 basis points or even higher for low-rated borrowers. Bonds typically pay a quarterly coupon, although semiannual and monthly coupon bonds are also issued. The first floating-rate note issue was by ENEL, an Italian utility company, in 1970. The majority of issuers are financial institutions such as banks and securities houses.
There are also perpetual, or undated, floating-rate notes, the first issue of which was by National Westminster Bank pic in 1984. They are essentially similar to regular floating-rate notes, except that they have no maturity date and are therefore "perpetual." Most perpetual floating-rate notes are issued by banks, for whom they are attractive because they are a means of raising capital similar to equity but with the tax advantages associated with debt. They also match the payment characteristics of the banks assets. Traditionally, the yield on perpetuals is higher than both conventional bonds and fixed-term floating-rate notes.
An innovation in the market from the late 1980s was the zero-coupon bond, or pure discount bond, which makes no interest payments. Like zero-coupon bonds initially in government markets, the main attraction of these bonds for investors was that, as no interest was payable, the return could be declared entirely as capital gain, thus allowing the bondholder to avoid income tax. Most jurisdictions including the United States and United Kingdom have adjusted their tax legislation so that the return on zero-coupon bonds now counts as income and not capital gain.
Another instrument that is common in the Eurobond market is the convertible bond. A Eurobond is convertible if it may be exchanged at some point for another instrument, usually the ordinary shares (equity) of the issuing company. The decision to elect to convert is at the discretion of the bondholder. Convertibles are analyzed as a structure comprised of a conventional bond and an embedded option.
The most common conversion feature is an equity convertible, which is a conventional bond that is convertible into the equity of the issuer. The conversion feature allows the bondholder to convert the Eurobond, on maturity or at specified times during the bond's life, into a specified number of shares of the issuing company at a set price. In some cases the bond is convertible into the shares of the company that is guaranteeing the bond. The issuing company must release new shares in the event of conversion. The price at which the bond is convertible into shares, known as the exercise price, is usually set at a premium above the market price of the ordinary shares in the market on the day the bond is issued. Investors will exercise their conversion rights only if the market price has risen sufficiently that a gain will be realized by converting. The incorporation of a conversion feature in a bond is designed to make the bond more attractive to investors, as it allows them to gain from a rise in the issuing company's share price. The conversion feature also acts as a floor for the bond price. The advantages of convertibles for borrowers include the following:
As the bond incorporates an added attraction in the form of the conversion feature, the coupon payable on the bond is lower than it otherwise would be; this enables the borrower to save on interest costs.
Issuing convertibles is one method by which companies can broaden the geographical base of their equity holders.
Companies are usually able to raise a higher amount at one issue if the bond is convertible, compared to a conventional bond.
Against these factors must be weighed certain disadvantages associated with convertibles, which include the following:
The investor's insurance against the volatility of share price movements, an attraction of the convertible is gained at the cost of a lower coupon than would be obtained from a conventional bond.
Convertibles are often issued by companies that would have greater difficulty placing conventional paper. Convertibles are usually subordinated and are often viewed more as equity rather than debt. The credit and interest rate risk associated with them is consequently higher than for conventional bonds.
There have been variations on the straight convertible bond in the Eurobond market. This includes the convertible preference share. This is a combination of a perpetual debt instrument cash flow with an option to convert into ordinary shares. Sometimes these issues are convertible not into shares of the issuer, but rather into the equity of a company in which the issuer has a significant shareholding.
Another variation is the equity note, which is a bond that is redeemed in shares and not in cash. The equity note is not a true convertible, since the conversion feature is not an option for the bondholder but a condition of the bond issue, and is guaranteed to take place. A more accurate description of an equity note would be an "interest-bearing equity future" note.
Eurobonds have also been issued with a feature that allows conversion into other assets such as crude oil or gold, or into other bonds with different payment characteristics. These are known as asset convertibles. Examples of such bonds include floating-rate notes that are convertible under specified circumstances into fixed-rate bonds. One version of this was the drop-lock bond, which was first introduced in the early 1980s during a period of high interest rates. Drop-lock bonds are initially issued as floating-rate notes but convert to a fixed-rate bond at the point that the reference rate falls to a preset level. The bond then pays this fixed rate for the remainder of its life. During the 1990s, as interest rate volatility fell to relatively lower levels, drop-locks fell out of favor, and it is now rare to see them issued.
Currency convertibles are bonds that are issued in one currency and are redeemed in another currency or currencies. Often, this at the discretion of the bondholder; other currency convertibles pay their coupon in a different currency to the one they are denominated in. In certain respects, currency convertibles possess similar characteristics to a conventional bond issued in conjunction with a forward contract. The conversion rate is specified at the time of issue, and may be either a fixed-rate option or a floating-rate option. With a fixed-rate option, the exchange rate between the currencies is fixed for the entire maturity of the bond at the time it is issued; with a floating-rate option, the exchange rate is not fixed and is the rate prevailing in the market at the time the conversion is exercised. Initially, most currency convertibles offered a fixed-rate option, so that the foreign exchange risk resided entirely with the issuer. Floating-rate options were introduced in the 1970s when exchange rates began to experience greater volatility.
The Eurobond warrant or Eurowarrant is essentially a call option attached to a conventional bond. The call option is convertible into either ordinary shares or other bonds of the issuing company or, rarely, another company. A typical Eurobond warrant will be comprised of a conventional bond, issued in denominations of $1,000 or $10,000, paying a fixed coupon. The attached warrant will entitle the bondholder to purchase shares (or bonds) at a specified price at set dates, or a set time period, up until maturity of the warrant, whereupon the warrant expires worthless. Warrants are often detached from their host bond and traded separately.
The exercise price of a warrant is fixed at a premium over the market price of the equity at issue. This premium is separate from the premium associated with a warrant in the secondary market, which is the total premium cost connected with buying the warrant and immediately exercising it into the equity, and not the cost associated with a purchase of the equity in the open market.
There are several advantages that Eurobond warrants hold for investors. They are composed of two assets that are usually traded separately in the secondary market; indeed, warrants are often attached to bonds as a "sweetener" for investors. Investors have an interest in the performance of the shares of the issuer without having a direct exposure to them. Should the intrinsic value of the warrant fall to zero, there is still time value associated with the warrant up until the maturity of the bond. Warrants typically possess high leverage or "gearing," which is defined as the ratio of the cost of the warrant to the cost of the shares that the warrant holder is entitled to purchase. Borrowers may also gain from attaching warrants to their bond issues. The advantages include being able to pay a lower coupon than might otherwise have been the case. The exercise of a warrant results in the issuer receiving cash for the shares that are purchased (albeit at a below-market rate), compared with a convertible bond, where the issuer receives only bonds that are subsequently canceled. This is a feature of the warrant's gearing, as the value of the warrant is always less than the price at which the company guarantees to issue new equity to the warrant holder. The disadvantage at the time the warrant is exercised is that the company is receiving a below-market price for its shares at a time when they are trading at a historically high level; however, there is a form of compensation for this since the company would have issued the bonds at a lower coupon rate than would have been the case had the warrants not been attached.
When a company raises a bond issue, its main concerns will be the success of the issue and the interest rate that must be paid for the funds borrowed. An issue is handled by an international syndicate of banks. A company wishing to make a bond issue will invite a number of investment banks and securities houses to bid for the role of lead manager. The bidding banks will indicate the price at which they believe they can get the issue away to investors, and the size of their fees. The company's choice of lead manager will be based on the bids, but also the reputation and standing of the bank in the market. The lead manager, when appointed, will assemble a syndicate of other banks to help with the issue. This syndicate will often be made up of banks from several different countries. The lead manager has essentially agreed to underwrite the issue, which means that it guarantees to take the paper off the issuer's hands (in return for a fee). If there is an insufficient level of investor demand for the bonds, the lead manager will be left holding ("wearing") the issue, which, in addition to being costly, will not help its name in the market. When we referred to an issuer's assessing the reputation of potential lead managers, this included the company's view on the "placing power" of the bank, its perceived ability to get the entire issue away. The borrowing company would prefer the issue to be oversubscribed, which is when demand outstrips supply.
In many cases the primary issue involves a fixed price reoffer scheme. The lead manager will form the syndicate, which will agree on a fixed issue price, a fixed commission, and the distribution among themselves of the quantity of bonds they agreed to take as part of the syndicate. The banks then reoffer the bonds that they have been allotted to the market, at the agreed price. This technique gives the lead manager greater control over a Eurobond issue. It sets the price at which other underwriters in the syndicate can initially sell the bonds to investors. The fixed price reoffer mechanism is designed to prevent underwriters from selling the bonds back to the lead manager at a discount to the original issue price, that is, "dumping" the bonds.
Before the bond issue is made, but after its basic details have been announced, it is traded for a time in the gray market. This is a term used to describe trading in the bonds before they officially come to the market, mainly market makers selling the bond short to other market players or investors. Activity in the gray market serves as useful market intelligence to the lead manager, which can gauge the level of demand that exists in the market for the issue. A final decision on the offer price is often delayed until dealing in the gray market indicates the best price at which the issue can be gotten away.
Let us now consider the primary market participants in greater detail.
The range of borrowers in the Euromarkets is very diverse. From virtually the inception of the market, borrowers representing corporates, sovereign and local governments, nationalized corporations, supranational institutions, and financial institutions have raised finance in the international markets. The majority of borrowing has been by governments, regional governments, and public agencies of developed countries, although the Eurobond market is increasingly a source of finance for developing country governments and corporates.
Governments and institutions access the Euromarkets for a number of reasons. Under certain circumstances, it is more advantageous for a borrower to raise funds outside its domestic market, due to the effects of tax or regulatory rules. The international markets are very competitive in terms of using intermediaries, and a borrower may well be able to raise cheaper funds in the international markets. Other reasons why borrowers access Eurobond markets include:
A desire to diversify sources of long-term funding. A bond issue is often placed with a wide range of institutional and private investors, rather than the more restricted investor base that may prevail in a domestic market. This gives the borrower access to a wider range of lenders, and for corporate borrowers this also enhances the international profile of the company.
For both corporates and emerging-country governments, the prestige associated with an issue of bonds in the international market.
The flexibility of a Eurobond issue compared to a domestic bond issue or bank loan, illustrated by the different types of Eurobond instruments available.
Against this are balanced the potential downsides of a Eurobond issue, which include the following:
For all but the largest and most creditworthy of borrowers, the rigid nature of the issue procedure becomes significant during times of interest and exchange rate volatility, reducing the funds available for borrowers.
Issuing debt in currencies other than those in which a company holds matching assets, or in which there are no prospects of earnings, exposes the issuer to foreign exchange risk.
Generally, though, the Euromarket remains an efficient and attractive market in which a company can raise finance for a wide range of maturities.
The nature of the Eurobond market is such that the ability of governments and corporates to access it varies greatly. Access to the market for a first-time borrower has historically been difficult and has been a function of global debt market conditions. There is a general set of criteria, first presented by van Agtmael (1983), that must be fulfilled initially, which for corporates include the following:
The company should ideally be domiciled in a country that is familiar to Eurobond issuers, usually as a result of previous offerings by the country's government or a government agency. This suggests that it is difficult for a corporate to access the market ahead of a first issue by the country's government.
The borrowing company must benefit from a level of name recognition or, failing this, a sufficient quality credit rating.
The company ideally must have a track record of success and needs to have published financial statements over a sufficient period of time, audited by a recognized and respected firm, and the company's management must make sufficient financial data available at the time of the issue.
The company's requirement for medium-term or long-term finance, represented by the bond issue, must be seen to fit into a formal strategic plan.
Generally, Eurobond issuers are investment-grade rated, and only a small number, less than 5% according to International Monetary Fund data, are not rated at all.
Issuers of debt in the Eurobond market select an investment bank to manage the bond issue for them. This bank is known as the underwriter because, in return for a fee, it takes on the risk of placing the bond among investors. If the bond cannot be placed in total, the underwriting bank will take on the paper itself. The issuer will pick an investment bank with whom it already has an existing relationship, or it may invite a number of banks to bid for the mandate. In the event of a competitive bid, the bank will be selected on the basis of the prospective coupon that can be offered, the fees and other expenses that it will charge, the willingness of the bank to support the issue in the secondary market, the track record of the bank in placing similar issues and the reach of the bank's client base. Often, it is a combination of a bank's existing relationship with the issuer and its reputation in the market for placing paper that will determine whether or not it wins the mandate for the issue.
After the mandate has been granted, and the investment bank is satisfied that the issuer meets its own requirements on counterparty and reputational risk, both parties will prepare a detailed financing proposal for the bond issue. This will cover topics such as the specific type of financing, the size and timing of the issue, approximate pricing, fees, and so on. The responsibilities of the lead manager include the following:
Analyzing the prospects of the bond issue being accepted by the market; this is a function of both the credit quality of the issuer and the market's capacity to absorb the issue.
Forming the syndicate of banks to share responsibility for placing the issue. These banks are co-lead managers and syndicate banks.
Assisting the borrower with the prospectus, which details the bond issue and also holds financial and other information on the issuing company.
Assuming responsibility for the legal issues involved in the transaction, for which the bank's in-house legal team and/or external legal counsel will be employed.
Preparing the documentation associated with the issue.
Taking responsibility for the handling of the fiduciary services associated with the issue, which is usually handled by a specialized agent bank.
If deemed necessary, establishing a pool of funds that can be used to stabilize the price of the issue in the gray market, used to buy (or sell) bonds if required.
These duties are usually undertaken jointly with other members of the syndicate. For first-time borrowers, the prospectus is a very important document, as it is the main communication media used to advertise the borrower to investors. In a corporate issue, the prospectus may include the analysis of the company by the underwriters, financial indicators and balance sheet data, a detailed description of the issue specifications, the members of the underwriting syndicate, and details of placement strategies. In a sovereign issue, the prospectus may cover a general description of the economy of the country's, including key economic indicators such as balance-of-payments figures and export and import levels, the state of the national accounts and budget, a description of the political situation (with an eye on the stability of the country), current economic activity, and a statement of the current external and public debt position of the country.
The function of the co-lead manager in Eurobond issues developed as a consequence of the distribution of placing ability across geographic markets. For example, as the Eurobond market developed, underwriters who were mainly U.S. or U.K. banks did not have significant client bases in say, the continental European market, and so banking houses that had a customer base there would be invited to take on some of the issue. For a long time the ability to place $5,000,000 nominal of a new Eurobond issue was taken as the benchmark against a potential co-lead manager.
The decision by a lead manager to invite other banks to participate will depend on the type and size of the issue. Global issues such as those by the World Bank, which have nominal sizes of $1 billion or more, have a fairly large syndicate. The lead manager will assess whether it can place all the paper or it, in order to achieve geographic spread (which may have been stipulated by the issuer) it needs to form a syndicate. It is common for small issues to be placed entirely by a single lead manager.
The structure of the Eurobond market, compared to domestic markets, lends a certain degree of anonymity, if such is desired, to end-investors. This is relevant essentially in the case of private investors. The institutional holders of investors are identical to those in the domestic bond markets, and include institutional investors such as insurance companies, pension funds, investment trusts, commercial banks, and corporations. Other investors include central banks and government agencies; for example, the Kuwait Investment Office and the Saudi Arabian Monetary Agency both have large Eurobond holdings. In the United Kingdom, banks and securities houses are keen holders of floating-rate note Eurobonds, usually issued by other financial institutions.
Traditionally, Eurobond issues were placed in accordance with an accepted broad set of pricing and fee rules.
The fee structures for placing and underwriting a Eurobond issue are relatively identical for most issues. The general rule is that fees increase with maturity and decreasing credit quality of the issuer, and decrease with nominal size. Fees are not paid directly but are obtained by adjusting the final price paid to the issuer, that is, taken out of the sale proceeds of the issue. The allocation of fees within a syndicate can be slightly more complex, and in the form of an underwriting allowance. This is usually paid out by the lead manager.
Table 24.1. Expense Elements, Eurobond Issue
Printing (prospectus, certificates, etc.) | Clearing and bond issuance |
Legal counsel (Issuer and investment bank) | Paying agent |
Stock exchange listing fee | Trustee |
Promotion | Custodian |
Underwriters expenses | Common depositary |
Typical fees will vary according to the type of issue and issuer, and also whether the bond itself is plain vanilla or more exotic. Fees range from 0.25% to 0.75% of the nominal of an issue. Higher fees may be charged for small issues.
The expenses associated with the launch of a Eurobond issue vary greatly. Table 24.1 illustrates the costs associated with a typical Eurobond transaction. Not every bond issue will incur every expense, however these elements are common. The expense items in this table do not include the issuer's own expenses with regard to financial accounting and marketing. The reimbursement for underwriters is intended to cover such items as legal expenses, travel, delivery of bonds, and other business expenses.
In general, Eurobonds are listed on either the London or Luxembourg stock exchange. Certain issues in the Asian markets are listed on the Singapore exchange. To enable listing to take place, an issuer will need to employ a listing agent, although this is usually arranged by the lead manager. The function of the listing agent is to (1) provide a professional opinion on the prospectus, (2) prepare the documentation for submission to the stock exchange, and (3) make a formal application and conduct negotiations on behalf of the issuer.
One of the primary tasks of the lead manager is the pricing of the new issue. The lead manager faces an inherent conflict of interest between its need to maximize its returns from the syndication process and its obligation to secure the best possible deal for the issuer, its client. An inflated issue price invariably causes the yield spread on the bond to rise as soon as the bond trades in the secondary market. This would result in a negative impression being associated with the issuer, which would affect its next offering. However, too low a price can permanently damage a lead manager's relationship with the client.
For Eurobonds that are conventional vanilla fixed-income instruments, pricing does not present too many problems in theory. The determinants of the price of a new issue are the same as those for a domestic bond offering and include the credit quality of the borrower, the maturity of the issue, the total nominal value, the presence of any option feature, and the prevailing level and volatility of market interest rates. Eurobonds are perhaps more heavily influenced by the target market's ability to absorb the issue, and this is gauged by the lead manager in its preliminary offering discussions with investors. The credit rating of a borrower is often similar to that granted to it for borrowings in its domestic market, although in many cases a corporate will have a different rating for its foreign currency debt compared to its domestic currency debt.
In the gray market, the lead manager will attempt to gauge the yield spread over the reference pricing bond at which investors will be happy to bid for the paper. The reference bond is the benchmark for the maturity that is equivalent to the maturity of the Eurobond. It is commonly observed that Eurobonds have the same maturity date as the benchmark bond that is used to price the issue. As lead managers often hedge their issue using the benchmark bond, an identical maturity date helps to reduce basis risk.
The three key dates in a new issue of Eurobonds are the announcement date, the offering day, and the closing day. Prior to the announcement date, the borrower and the lead manager (and co-lead managers if applicable) will have had preliminary discussions to confirm the issue specifications, such as its total nominal size, the target coupon, and the offer price. These details are provisional and may well be different at the time of the closing date. At these preliminary meetings, the lead manager will appoint a fiscal agent or trustee and a principal paying agent. The lead manager will appoint other members of the syndicate group, and the legal documentation and prospectus will be prepared.
On the announcement date the new issue is formally announced, usually via a press release. The announcement includes the maturity of the issuer and a coupon rate or range in which the coupon is expected to fall. A telex is also sent by the lead manager to each prospective underwriter, which is a formal invitation to participate in the syndicate. These banks will also receive the preliminary offering circular, a timetable of relevant dates for the issue, and documentation that discloses the legal obligations that they are expected to follow should they decide to participate in the issue. The decision to join is mainly, but not wholly, a function of the bank's clients' interest in the issue, which the bank needs to sound out.
The pricing day signals the end of the subscription period, the point at which the final terms and conditions of the issue are agreed between the borrower and the syndicate group. If there has been a significant change in market conditions, the specifications of the bond issue will change. Otherwise, any required final adjustment of the price is usually undertaken by a change in the price of the bond relative to par. The ability of the lead manager to assess market conditions accurately at this time is vital to the successful pricing of the issue.
Once the final specifications have been determined, members of the syndicate have roughly 24 hours to accept or reject the negotiated terms; the bonds are then formally offered on the offering day, the day after the pricing day, when the issuer and the managing group sign the subscription or underwriting agreement containing the final specifications of the issue. The underwriting syndicate then enters into a legal commitment to purchase the bonds from the issuer at the price announced on the pricing day. A final offering circular is the produced, and the lead manager informs the syndicate of the amount of their allotments. The lead manager may wish to either overal-locate or underallocate the number of available bonds, depending on its view on future levels and direction of interest rates. There then begins the stabilization period, when the bonds begin to trade in the secondary period, where Eurobonds trade in an over-the-counter market. About 14 days after the offering day, the closing day occurs. This is when syndicate members pay for bonds they have purchased, usually by depositing funds into a bank account opened and run by the lead manager on behalf of the issuer. The bond itself is usually represented by a global note, held in Euroclear or Clearstream, initially issued in temporary form. The temporary note is later changed to a permanent global note. Tranches of an issue targeted at U.S. investors may be held in the Depository Trust Corporation as a registered note.
The subscription period of a new Eurobond issue is characterized by uncertainty about potential changes in market conditions. After the announcement of the issue, but before the bonds have been formally issued, the bonds trade in the gray market. The gray market is where bonds are bought and sold for settlement on the first settlement date after the offering day. Gray market trading enables the lead manager to gauge the extent of investor appetite for the issue, and make any adjustment to coupon if required. A gray market that functions efficiently will, at any time, reflect the market's view on where the bond should trade, and what yield the bond should be offered. It enables investors to trade in the primary market possessing information as to the likely price of the issue in the secondary market.
Another principal task of the lead manager is to stabilize the price of the bond issue for a short period after the bond has started trading in the secondary market. This is known as the stabilization period, and the process is undertaken by the lead manager in concert with some or all of the syndicate members. A previously established pool of funds may be used for this purpose. The price at which stabilization occurs is known as the syndicate bid.
In addition to the traditional issue procedure where a lead manager and syndicate offer bonds to investors based on a price set, on pricing day, based on a yield over the benchmark bond, there are a number of other issue procedures that are used. One of these methods is the bought deal, where a lead manager or a managing group approaches the issuer with a firm bid, specifying issue price, amount, coupon, and yield. Only a few hours are allowed for the borrower to accept or reject the terms. If the bid is accepted, the lead manager purchases the entire bond issue from the borrower. The lead manager then has the option of selling part of the issue to other banks for distribution to investors, or doing so itself. In a volatile market, the lead manager will probably parcel some of the issue to other banks for placement. However, it is at this time that the risk of banks dumping bonds on the secondary market is highest; in this respect, lead managers will usually preplace the bonds with institutional investors before the bid is made. The bought deal is focused primarily on institutional rather than private investors. As the syndicate process is not used, the bought deal requires a lead manager with sufficient capital and placement power to enable the entire issue to be placed.
In a prepriced offering, the lead manager's bid is contingent on its ability to form a selling group for the issue. Any alterations in the bid required for the formation of the group must be approved by the borrower. The period allocated for the formation of the group is usually two to four days, and after the group has been formed, the process is identical to that for the bought deal.
Yet another approach is the auction issue, under which the issuer will announce the maturity and coupon of a prospective issue and invite interested investors to submit bids. The bids are submitted by banks, securities houses, and brokers and include both price and amount. The advantages of the auction process is that it avoids the management fees and costs associated with a syndicate issue. However, the issuer does not have the use of a lead manager's marketing and placement expertise, which means it is a method that can be employed only by very high-quality, well-known borrowers.
Eurobonds are unsecured, and as such, the yield demanded by the market for any particular bond will depend on the credit rating of the issuer. Until the early 1980s, Eurobonds were generally issued without covenants, due to the high quality of most issuers. Nowadays, it is common for covenants to be given with Eurobond issues. Three covenants in particular are frequently demanded by investors:
A negative pledge
An "event risk" clause
A gearing ratio covenant
A negative pledge is one that restricts the borrowings of the group that ranks in priority ahead of the debt represented by the Eurobond. In the case of an unsecured Eurobond issue, this covenant restricts new secured borrowings by the issuer, as well as new unsecured borrowings by any of the issuer's subsidiaries, since these would rank ahead of the unsecured borrowings by the parent company in the event of the whole group going into receivership.
This sets a limit on the amount of assets that can be disposed of by the borrower during the tenor (term to maturity) of the debt. The limit on disposals could be, typically, a cumulative total of 30% of the gross assets of the company. This covenant is intended to prevent a breakup of the company without reference to the Eurobond investors.
A Eurobond issue requires an agent bank to service it during its life. The range of activities required is detailed below.
The depositary for a Eurobond issue is responsible for the safekeeping of securities. In the Euromarkets, well over 90% of investors are institutions, and as a result, issues are made in dematerialized form and are represented by a global note. Trading and settlement is in computerized book-entry form via the two main international clearing systems, Euroclear and Clearstream. Both these institutions have appointed a group of banks to act on their behalf as depositaries for book-entry securities; they are known as common depositaries, because the appointment is common to both Euroclear and Clearstream. Both clearing firms have appointed separately a network of banks to act as specialized depositaries, which handled securities that have been issued in printed note or definitive form.
The common depositary is responsible for:
Representing Euroclear and Clearstream, and facilitating delivery-versus-payment of the primary market issue by collecting funds from the investors, taking possession of the temporary global note (which allows securities to be released to investors), and making a single payment of funds to the issuer.
Holding the temporary global note in safe custody, until it is exchanged for definitive notes or a permanent global note.
Making adjustments to the nominal value of the global note that occur after the exercise of any options or after conversions, in line with instructions from Euroclear or Clearstream and the fiscal agent.
Surrendering the canceled temporary global note to the fiscal agent after the exchange into definitive certificates or a permanent global note, or on maturity of the permanent global note.
A specialized depositary will hold definitive notes representing aggregate investor positions held in a particular issue; on coupon and maturity dates, it presents the coupons or bond to the paying agent and passes the proceeds on to the clearing system.
Debt issuance in the Euromarkets requires a fiscal or principal paying agent, or in the case of a program of issuance (e.g., a Euro medium-term note program) an issuing and paying agent. The responsibility of the paying agent is to provide administrative support to the issuer throughout the lifetime of the issue. The duties of a paying agent include:
Issuing securities upon demand in the case of a debt program.
Authenticating definitive notes.
Collecting funds from the issuer and paying these out to investors as coupon and redemption payments.
In the case of global notes, acting on behalf of the issuer to supervise payments of interest and principal to investors via the clearing systems, and in the case of definitive notes, paying out interest and coupon on presentation by the investor of the relevant coupon or bond to the paying agent.
Transferring funds to sub-paying agents, where these have been appointed. A security that has been listed in Luxembourg must have a local sub-paying agent appointed for it.
Maintaining an account of the cash flows paid out on the bond.
Arranging the cancellation and subsequent payment of coupons, matured bonds, and global notes and sending destroyed certificates to the issuer.
A paying agent will act solely on behalf of the issuer, unlike a trustee, who has an obligation to look after the interests of investors. For larger bond issues, there may be a number of paying agents appointed, of which the principal paying agent is the coordinator. A number of sub-paying agents may be appointed to ensure that bondholders in different country locations may receive their coupon and redemption payments without delay. The term "fiscal agent" is used to describe a paying agent for a bond issue for which no trustee has been appointed.
The role of the registrar is essentially administrative, and it is responsible for keeping accurate records of bond ownership for registered securities. As most Eurobonds are issued in bearer form, there is not a great deal of work for registrars in the Euromarket, and the number of holders of registered notes is normally quite low.
The responsibilities of the registrar include:
Maintaining a register of all bondholders and records of all transfers of ownership.
Coordinating the registration, transfer, or exchange of bonds.
Issuing and authenticating new bonds should any transfer or exchange take place.
Maintaining a record of the outstanding principal value of the bond.
Undertaking administrative functions relating to any special transfers.
An issuer may appoint a trustee to represent the interests of investors. In the event of default, the trustee is required to discharge its duties on behalf of bondholders. In certain markets, a trustee is required by law; for instance, in the United States, a trustee has been a legal requirement since 1939. In other markets, an issuer may appoint a trustee in order to make the bond issue more attractive to investors, as it means that there is an independent body to help look after their interests. This is particularly important for a secured issue, where the trustee sometimes holds collateral for the benefit of investors. Assets that are held by the trustee can be protected from the creditors of the issuer in the event of bankruptcy. A trustee has a variety of powers and discretion, which are stated formally in the issue trust deed, and these include its duties in relation to the monitoring of covenants and duties to bondholders.
A custodian provides safekeeping services for securities belonging to a client. The client may be an institutional investor, such as a pension fund, that requires a portfolio of securities in many locations to be kept in secure custody on their behalf. As well as holding securities, the custodian usually manages corporate actions such as dividend payments.
A Eurobond issuer will appoint either a fiscal agent or a trustee; both perform similar roles but under differing legal arrangements. The fiscal agent is appointed by and is the representative of the issuer, so, unlike a trustee, it does not represent the bondholders. The main responsibilities of the fiscal agent are to pay the principal and interest payments, and it performs a number of administrative roles as well, such as the publication of financial information and notices to investors.
Issuers must appoint a listing agent if they wish to list the bond on the London or Luxembourg stock exchange, as this is a requirement of the rules of the exchange. The listing agent communicates with the exchange on behalf of the issuer, and lodges the required documentation with it. In the United Kingdom, the listing agent must be authorized under financial regulatory legislation and is usually the lead manager for the issue, although it is also common for a fiduciary service provider to be appointed to this role.
Eurobonds are issued in temporary global form or permanent global form. If issued in temporary form, the note is subsequently changed into either permanent global form or definitive form, which may be either a bearer note or registered.
On issue, the majority of Eurobonds are in the form of a single document known as a "temporary global bond." This document represents the entire issue, executed by an officer of the issuer and certified by the fiscal agent or principal paying agent. After a period of time, the temporary global bond, as its name suggests, is exchanged for either a permanent global bond or bonds in definitive form, which are separate certificates representing each bond holding.
The main reason bonds are issued in temporary form is time constraints between the launch of issue, when the offer is announced to the market, and closing, when the bonds are actually issued. This period differs according to the type of issue and instrument; for example, for a plain vanilla issue, it can be as little as two weeks, whereas for more exotic issues (such as a securitization), it can be a matter of months. The borrower will be keen to have the periods short as possible, as the financing is usually required quickly. As this results in there being insufficient time to complete the security printing and authentication of the certificates, which represent the final definitive form, a temporary bond is issued to enable the offering to be closed and placed in a clearing system, while the final certificates are produced. Bonds are also issued in temporary form to comply with certain domestic selling regulations and restrictions, for example, a U.S. regulation that definitive bonds cannot be delivered for a 40-day period after issue. This is known as the "lock-up" period.
Like the temporary bond, the permanent global bond is a word-processed document and not a security-printed certificate, issued on the closing date. It represents the entire issue and is compiled by the underwriter's legal representatives. In most cases, it is actually held for safekeeping on behalf of Euroclear and Clearstream by the trust or clearing arm of a bank, known as the "common depositary." Borrowers often prefer to issue notes in permanent global form because this carries lower costs compared to definitive notes, which are security printed.
Under any circumstances where it is required that investors have legal ownership of the debt obligation represented by a bond issue they have purchased, a borrower is obliged to issue the bond in definitive form. The situations under which this becomes necessary are listed on the permanent global bond document, and include the following:
Where an investor requires a definitive bond to prove legal entitlement to the bond (s)he has purchased, in the case of any legal proceedings undertaken concerning the bond issue.
In the event of default, or if investors believe default to have occurred.
Where for any reason the bonds can no longer be cleared through a clearing system, in which case they must be physically delivered in the form of certificates.
Bonds issued in definitive form may be either bearer or registered securities. A bearer security has similar characteristics to cash money, in that the certificates are documents of value and the holder is considered to be the beneficiary and legal owner of the bond. The bond certificate is security printed and the nature of the debt obligation is detailed on the certificate. Transfer of a bearer security is by physical delivery. Some of the features of traditional bearer securities include:
Coupons, attached to the side of the certificate, which represent each interest payment for the life of the bond. The holder is required to detach each coupon as it becomes due and send it to the issuer's paying agent.
A promise to pay, much like a bank note, which confirms that the issuer will pay the bearer the face value of the bond on the specified maturity date.
In some cases, a talon, which is the right for the bondholder to claim a further set of coupons once the existing set has been used (this applies only to bonds that have more than 27 interest payments during their lifetime, as International Capital Markets Association (ICMA, the professional association of the Eurobond dealing community) rules prohibit the attachment of more than 27 coupons to a bond on issue).
The administrative burdens associated with bearer securities is the main reason why the procedures associated with them are carried out via the clearing systems and paying agents, rather than individually by each investor.
Bonds issued in registered from are transferred by an entry on a register held by the issuer or its agent; the promise to pay is made to those names that appear on the register. Most Eurobonds are issued in bearer form for ease in clearing. Issues that are placed wholly or partly in the United States do, however, include an option allowing investors to take the bonds in registered form. This is done as most issues in the United States are sold under private placement, in order to be exempt from SEC selling restrictions, and private placement in that country requires that the bonds are in registered form. In such cases, the issuer will appoint a New York registrar for the issuer, usually the trust arm of a bank.
The development of the international bond market has taken place alongside the introduction of specialized clearing systems, which are responsible (among other things) for the settlement and safekeeping of Eurobonds. The two main clearing systems are Euroclear and Clearstream.
Euroclear was created by the Morgan Guaranty Trust Company of New York in 1968. Ultimately, ownership passed to a consortium of banks, and it is now run by Euroclear Clearance Systems pic, and operated by a cooperative company in Brussels.
The original Cedel was created in 1970 in Luxembourg and is owned by a consortium of around 100 banks, no one of which may hold more than 5% of the company. The two clearing systems do not restrict their operations to the settlement and custody of Eurobonds.
Both clearing systems exist to avoid the physical handling of bearer instruments, both on issue and in the secondary market. This means that on issue the actual bond certificates, which may be in definitive bearer or global form are passed on to a "trust" bank, known as the depositary for safekeeping. The clearing system will track holdings via a book entry. To participate in the clearing system setup, an investor must have two accounts with it, which may be its own accounts or accounts held by their bank, who will act as a nominee on their behalf; these are a securities clearance account, to which a security is credited, and a cash account, through which cash is received or paid out.
The clearing system will allocate a unique identification code, known as the International Securities Identification Number (ISIN) to each Eurobond issue, and a "common code" is derived from the ISIN. The common code is essentially the identification used for each bond issue whenever an instruction is sent to the clearing agent to deal in it. The ISIN will be in addition to any number issued by a domestic clearing agent, for example, the stock exchange number for London listed securities. Both clearing systems have specific roles in both the primary and secondary markets. In the primary market, they accept a new issue of Eurobonds, and on closing, the required number of bonds are credited to the securities clearance account of the banks that are part of the issue syndicate. Securities are then transferred (electronic book entry) to securities accounts of investors.
The clearance systems keep a record on the coupon payment and redemption dates for each bond, and "present" the bonds for payment on each appropriate date. Investors, therefore, do not need to present any coupons or certificates themselves, which is why the system is now paperless.
Most Eurobonds are tradeable, although the liquidity of individual issues is variable. Although in theory transfer is by physical delivery because the bonds are bearer instruments, the great majority of bonds will settle by the Euroclear or Clearstream International ("Clearstream") settlement systems. Liquidity in the market varies over time and for individual issues will be a function of:
Size of issue.
Level of investor demand for the paper.
Commitment of market makers to support the issue.
A large number of Eurobonds are illiquid, and market makers will quote a bid price only. No offer price is made because the market maker (unless he actually owns some of the issue) will be unable to find bonds to deliver to the buyer if it is illiquid. Many Eurobonds issued in second-tier currencies, such as Malaysian ringgit, will have been issued and then immediately asset swapped, and hence there will be no paper available to trade. Many large issuers will issue Eurobonds in a currency other than that which they require, in order to meet a specific customer demand for paper in that currency; after issue, the proceeds are swapped into the desired currency. In the meantime, the bonds will be held to maturity by the investors and usually not traded in the secondary market.
High-quality Eurobond issues will trade almost as government paper. For example, issues by the World Bank or the European Investment Bank (EIB) trade at very low spreads above the same currency government bonds, and at sub-LIBOR in the asset-swap market, and are highly liquid. For example, at times, EIB sterling Eurobonds have traded at only 7 to 9 basis points above the same maturity gilt. At the other end of the spectrum are those Eurobonds issued by infrequent issuers, for which no offer price may be available.
The market in trading Eurobonds is conducted on an OTC basis. In 1998, a number of automated electronic trading system were also introduced. The preeminence of London as the main trading center for the Eurobond market is well established, although Brussels, Frankfurt, Zurich, and Singapore are also important trading centers. The advantages of London as a trading center are generally regarded as being:
A low level of regulatory interference in the functioning of the market.
The presence of well-established infrastructure and institutions, as well as experienced human resources.
The use of the English language as the market's main language of communication.
There are over 40 different market makers registered with the ICMA, and although in theory they are all required to make two-way prices in their chosen markets, the level of commitment is very varied. The bid-offer spread can be as low as 0.10 for very liquid issues such as World Bank and EIB bonds, to no offer price quoted for illiquid issues. In between, there is a range of spread sizes. The normal market size also varies, from £100,000 nominal to £500,000.
The valuation of Eurobonds is usually done on the basis of a yield spread over the relevant government bond yield curve. This yield spread is a function of the credit quality of the bond, its liquidity in the market, and the level of supply and demand. The bonds also move in line with general moves in interest rates, so that if there is a change in the gilt yield curve, a sterling Eurobond will change in yield, irrespective of whether the bond's issuer was perceived as being a weaker or a stronger credit. A market maker wishing to hedge a position in Eurobonds will usually use either the benchmark government against which the bond is priced or, if a noncash option is preferred, will use bond futures contracts to hedge the position.
Investor and borrowers in the Eurobond market may at any one time fall under the auspicies of a number of countries laws and regulations. These relate to the withholding tax on the bond coupons, income tax, disclosure and prospectus requirements, and restrictions on sales to certain classes of investor. The most important legal considerations for professional participants relate to (1) the possibility that the bonds are eventually distributed to residents in the United States, which is prohibited; and (2) London, as the principal financial center where the sale and trading of bonds takes place. The first consideration means that the market is subject to legislation in the United States that dates from the U.S. Securities Act of 1933 and federal income tax regulations. The second consideration means that the market comes under certain aspects of English law. With regard to taxation, the key features of Eurobonds are that:
The bonds are "bearer" rather than registered securities.
Interest and principal payments are not subject to withholding tax at source in the country where the issuer is resident for tax purposes.
The fact that payments of interest and principal on Eurobonds are not subject to any form of withholding tax at source in the country where the borrower is deemed to be resident for tax purposes is the primary feature of Eurobonds for investors, generally cited to be of key importance in making the market attractive for investors across a range of countries. Nonresident investors in Eurobonds are usually subject to the withholding tax requirements of the resident country of the bond issuer when that party repays interest or principal on bonds held by these nonresidents. The tax advantages to an investor from the absence of withholding tax (combined with the fact that the bonds are issued in bearer form) are significant. A large proportion of Eurobonds are held by private investors, and much of this is made anonymously by means of external discretionary accounts, such as those run by Swiss banks. This is a source of some frustration to tax authorities in certain countries. The absence of withholding tax also confers a certain benefit to issuers of Eurobonds. Where a bond issue was subject to withholding tax, an issuer would need to make the terms of the issue more attractive, that is, a higher coupon, in order to make the bond as attractive as the Eurobond issuer. This will carry higher associated costs for the issuer.
The issue of new Eurobonds and the use of "asset swaps" in conjunction with issues is a vital part of the market, with investment banks keeping a close observation of the asset swap curve to spot any opportunities that may arise that makes a new issue of paper more attractive. New issues of Eurobonds are often launched to facilitate a swap which has been arranged in advance.
The existence of the currency swap and asset swap market is one of the key reasons for the growth and popularity of the Eurobond market. A borrower can issue bonds in virtually any liquid and convertible currency, according to where there is demand and what the yield curve looks like, and swap the proceeds into the currency that it requires. The cost of borrowing is usually significantly lower than if the borrower had issued bonds in the required currency. Swap driven issues are very common in the Eurobond market, and the key motivator is that borrowing costs will be cheaper. If this cheap borrowing opportunity is not available, it is unlikely that the bond will be issued, because entering into a swap exposes the issuer to additional credit risk. Swap financing will require a borrower to obtain debt initially that has undesirable currency and/or coupon characteristics. If the counterparty to a swap defaults, the borrower will be left with a risk exposure on the original debt. However, swap financing remains attractive because of the opportunity to obtain cheaper borrowing costs, despite the additional exposure to credit risk entailed in the transaction.
The market in swaps is governed by the International Swaps and Derivatives Association (ISDA). In the market, the majority of transactions are plain vanilla in nature and involve one of the following:
Cross-currency fixed-rate swaps, usually referred to as currency swaps.
Interest-rate swaps.
Cross-currency hybrid swaps.
Basis swaps.
Currency swaps are very common in the market. Under the plain vanilla version, two counterparties issue fixed-rate debt denominated in different currencies. They then exchange the interest (and sometimes) the principal repayments on their respective debt obligations. Under the conventional pattern, the amounts exchanged remain fixed at maturity. We will not cover the mechanics of a currency swap here, as this is reviewed in any number of derivatives texts, as are interest-rate swaps and the concepts of comparative advantage and the fixed- versus floating-rate legs of an interest-rate swap. Swap agreements do not always involve the exchange of debt repayment streams. In certain cases, one of the revenue streams exchanged in a swap can represent the income interest stream on an asset, or conventional security such as a corporate bond. Eurobond issues are frequently brought to the market primarily for the purpose of such "asset swapping." For the investment bank, swapping asset base interest payments is one means by which bond issues can be repackaged.
Other instruments used include basis swaps, which involve the exchange of two floating-rate payments streams, each of which is based on a short-term interest rate. The most common of these instruments have the following reference rates:
LIBOR versus the U.S. commercial paper rate
LIBOR versus the prime rate
Basis swaps are not the primary motivators of Eurobond issues, but are often included in more complex swap agreements, which may involve Eurobond borrowing.
For further details on the use of swap arrangements as part of Eurobond transactions, see Choudhry (2004a).
Settlement of Eurobond transactions takes place within 28 days for primary market issues and T + 3 days for secondary market trades. Virtually all trades settle within the two main clearing systems, Euroclear and Clearstream. Euroclear was established in Brussels in 1968 by an international group of banks, the original entity known as Cedel was established in Luxembourg in 1970. Both clearing systems will settle in T + 3 days; however, the facility exists to settle trades in T + 1 if both parties to a trade wish it.
In the Euroclear system bonds are placed in the custody of the clearing system, through a Europe-wide network of depository banks. The transfer of bonds on settlement is undertaken by means of a computer book entry. This was the basic concept behind the introduction of Euroclear, the substitution of book entries for the physical movement of bonds. The actual physical securities to which a trading party has title are not identified in the majority of transactions made through Euroclear. The clearing system is made possible because the terms and conditions of any Eurobond issue are objectively specified, so that all bonds of a particular issue are standardized and therefore fungible for one another. There is no requirement to assign a specific bond serial number to an individual holder, which occurs with registered bonds. Clearstream operates on much the same basis. Participants in either system must be institutions with their own account (they may have an agent settle for them). Settlement takes place through the simultaneous exchange of bonds for cash on the books of the system. An "electronic bridge" connecting the two systems allows transfer of securities from one to the other.
The Eurobond market has grown into an important sector of the debt capital markets. Originally driven by investor and regulatory restrictions in the United States, it is now the vital conduit through which capital is raised for sovereign and corporate borrowers alike. Bond issues are unsecured, so their relative attraction for investors depends on their formal credit rating and the liquidity of the secondary market. This liquidity differs by issuer name from very liquid to completely illiquid. Bonds are issued by a syndicate of banks and settle in the international clearing systems, Euroclear and Clearstream, by electronic book entry. There is wide variation in the type of bonds that are issued, from plain vanilla to structured and index-linked securities. All bonds issued as part of structured finance transactions are usually issued as Eurobonds.
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