Types of Bonds
International Bond Issues - Eurobonds, Global Bonds, Foreign Bonds
The name Eurobonds can be misleading because from the word, you’d think either Eurobonds were about the European bond markets, or about the European currency, Euros. Eurobonds are actually bonds that are denominated in a currency other than that of the country in which they are issued. They are usually issued in more than one country of issue and traded across international financial centres.
Supranational organisations and corporations are major issuers in the Eurobond market. Supranational organisations (such as the World Bank or the European Bank for Reconstruction and Development) use such bond issues for financing the development of emerging markets or to support developing countries. Corporations, including banks and multinational entities issue Eurobonds for many purposes including financing for capital and other projects. Eurobonds are not regulated by the country of the currency in which they are denominated. Eurobonds are so-called “bearer bonds”, they are not registered anywhere centrally, so whomever holds or bears the bond is considered the owner. Their “bearer” status also enables Eurobonds to be held anonymously.
The Eurobond market is largely a wholesale, institutional market with bonds held by large institutions. There are few individual investors in the Eurobond market, in general—fewer in the UK than on the continent. Since many investors hold Eurobonds for a long time, these bond issues may not be frequently traded which will make it more difficult for an investor who wants to buy or sell a Eurobond to assess the market price.
Types of Eurobonds
- Conventional or Straight Eurobonds have a fixed coupon (usually paid on an annual basis) and maturity date when all the principal is repaid.
- Floating rate bond notes (FRN) are usually short to medium term bond issues, with a coupon interest rate that “floats,” i.e. goes up or down in relation to a benchmark rate plus some additional “spread” of basis points (each basis point being one hundredth of one percent). The reference benchmark rate is usually LIBOR (London interbank offered rate) or EURIBOR (Euro interbank offered rate). The “spread” added to that reference rate is a function of the credit quality of the issuer.
- Zero-coupon bonds do not have interest payments. The investor in this type of Eurobond may be looking for some kind of tax advantage.
- Convertible bonds can be exchanged for another instrument, usually an ordinary share or shares (fixed ahead of time with a predetermined price) of the issuing organisation. The bondholder decides whether to convert the bond. In convertible bonds, the coupon payable is usually lower than it otherwise would be. Because convertible bonds can be viewed more as equity shares than bonds, the credit and interest rate risks for investors are higher than with conventional bonds.
- High-yield bonds are also part of the Eurobond markets, a class of bonds (rather than a type of bond) which individual investors may encounter. High-yield bonds are those that are rated to be “below investment grade” by credit rating agencies (i.e. issuer has a credit rating below BBB).
Eurobonds - Buying and Selling
Banks and brokers can help investors buy and sell Eurobonds but most market professionals advise potential individual investors to take advice and be sure any broker or bank you use has expertise in the type of Eurobond that you are interested in.
Eurobond issuers price Eurobonds related to LIBOR, EURIBOR or the U.S. Treasury Bond Market Yield curve, adjusted to indicate the credit quality of the issuer.
Some investors considering investing in Eurobonds, especially ones denominated in a currency other than the U.S. dollar, may see mention of a swap curve related to pricing. An interest rate swap has to do with how corporations and banks think interest rates will go, whether a rate will go up or go down or stay the same and is effectively the fixed rate banks will pay to convert a floating rate bond to fixed for the various maturities.
There are advantages to Eurobond investments but there are complexities and risks attached. Individual investors may consider individual Eurobond issuers or Eurobond funds.
On individual Eurobond issuers, the credit quality and credit rating of the issuer are very important for an investor to understand. Investors have credit risk in investing in a Eurobond, and need to be able to judge whether the yield on the bond is worth the risk. The credit quality of some sectors of Eurobond issuers may generally be higher than others but each investment must be considered on the basis of the issuer and the research and documentation provided, not on some overall sense of what kinds of organisations are good or bad.
If the Eurobond issuer is a corporation, there may also be significant “event risk” as well, since credit ratings can change over time as corporations change.
Also, as noted above, many investors hold Eurobonds for a long time so Eurobond issues may not be frequently traded which will make it more difficult for an investor who wants to buy or sell a Eurobond to assess the market price. Consult a financial advisor.