Eurobond
A Eurobond is a debt instrument that is denominated in a currency other than that of the country or market in which it is issued. This financial instrument plays a significant role in international finance by providing issuers with access to capital markets outside their home country, thereby diversifying their funding sources and potentially reducing borrowing costs.
History
The concept of Eurobonds emerged in the 1960s. The first Eurobond was issued in 1963 by the Italian company Autostrade when it raised $15 million to finance the construction of Italy's first motorway. This bond was denominated in US dollars but issued in London, outside the regulatory jurisdiction of the US, thus bypassing American regulations like the Interest Equalization Tax and Foreign Investment in Real Property Tax Act.
Characteristics
- Currency: Eurobonds are often issued in major currencies like the US dollar, Euro, Pound Sterling, or Yen, but they can be denominated in any currency.
- Bearer Form: Traditionally, Eurobonds were issued in bearer form, meaning the bondholder was anonymous, which provided tax advantages and privacy.
- Regulation: They are typically issued outside the jurisdiction of any single country, which reduces regulatory oversight compared to domestic bonds.
- Market: Eurobonds are traded in the Eurobond market, which is an over-the-counter market without a centralized exchange.
- Settlement: The settlement of Eurobonds usually occurs through systems like Euroclear and Clearstream.
Advantages
- Access to Global Investors: Issuers can reach a broader investor base, potentially lowering their cost of capital.
- Currency Diversification: Borrowers can match liabilities with assets in different currencies.
- Regulatory Arbitrage: Eurobonds often allow issuers to bypass stringent local regulations.
- Privacy: The anonymity of bearer bonds was a significant draw until regulations tightened this aspect.
Disadvantages
- Currency Risk: Both issuers and investors face currency exchange risk.
- Complexity: Managing a Eurobond issue can be complex due to international legal and tax considerations.
- Regulatory Changes: Over time, regulations have evolved, reducing some of the initial advantages like anonymity.
Notable Developments
- In 1984, the Big Bang in London deregulated the financial markets, further boosting the Eurobond market.
- The introduction of the Euro in 1999 led to the creation of a significant market for Euro-denominated bonds, known as Euro-Eurobonds.
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