Eurobond

A Eurobond is an international bond denominated in a currency other than the currency of the country or market in which it is issued. A US dollar bond sold by a Brazilian company to investors in London, Zurich and Singapore is a Eurobond, as is a yen bond issued by a European bank to investors outside Japan. Companies, banks, governments and international institutions use Eurobonds to raise money from a global pool of investors, often more cheaply or in larger size than at home.

The "Euro" prefix is historical and has nothing to do with the euro currency, which came decades later. It comes from the Eurodollar market, where US dollars were deposited and lent in Europe outside US banking rules. A Eurobond differs from a foreign bond, which is issued in a domestic market and currency by a foreign borrower, such as a "Yankee" bond sold in the US by a non-US issuer and registered with the SEC. Eurobonds sit outside any single national regulator, though the law governing the documents, usually English or New York law, still applies.

Most bonds are sold at home: a German company borrows euros from German savers. A Eurobond is more like holding a market stall in an international trading hall. The borrower picks the currency buyers most want, often US dollars, and sells to investors from many countries at once, all in a venue that is not the home of that currency.

Because the market sits between countries, borrowers can reach far more lenders. In exchange, investors need to trust the borrower without the protection of a single domestic regulator watching over every detail.

The first Eurobond is generally dated to July 1963, when Autostrade, the Italian motorway operator, raised 15 million US dollars through a bond arranged by the London merchant bank S.G. Warburg and listed in Luxembourg. The timing mattered. In the same month the United States proposed the Interest Equalization Tax, which made it more expensive for foreign borrowers to issue bonds in New York. Combined with the growing pool of dollars held outside the US under the Bretton Woods system, this pushed dollar borrowing offshore, and London became the centre of the new market.

Settlement infrastructure followed: Euroclear was founded in 1968 and Cedel, now Clearstream, in 1970, allowing bonds to change hands through book entries rather than physical delivery. Early Eurobonds were bearer instruments, which made them attractive to investors seeking privacy, and they generally paid interest without withholding tax. Today they are held in global form through the clearing systems, and tax transparency rules have removed most of the anonymity. The City of London remains the largest centre for issuance and trading.

1. The issuer appoints one or more investment banks as lead managers, which arrange the deal and usually provide underwriting as part of a syndicate.
2. The banks prepare an offering document, obtain a credit rating and market the bond to institutional investors in several countries.
3. Pricing is set through a book-building process, and the bond is often listed on an exchange such as Luxembourg, London or Dublin to meet investor requirements.
4. The bonds settle through Euroclear and Clearstream, and trade over the counter afterwards.

Offerings are usually structured to avoid full US registration, sold outside the US under the SEC's Regulation S and, where needed, to large US institutions under Rule 144A. Industry practice is coordinated by the International Capital Market Association (ICMA). Eurobonds can pay a fixed rate or a floating one, as with a Euro floating rate note, and can be convertible or green.

For many governments in emerging markets, "Eurobond" is the everyday name for their international dollar or euro government bonds. Pakistan, Nigeria, Kenya, Egypt, Ghana and many others have issued them to finance budgets and build foreign exchange reserves. These bonds create foreign currency debt, which a government cannot repay by printing its own money. When the local currency falls, the debt grows in local terms, raising sovereign risk.

This exposure has repeatedly ended in sovereign default and debt restructuring, with Argentina, Sri Lanka, Zambia and Ghana among recent cases. Because Eurobonds are usually governed by English or New York law, disputes are heard in those courts, and collective action clauses now allow a qualified majority of bondholders to agree restructuring terms that bind holdouts.

• Currency risk. Investors and issuers face exchange rate movements if their income or spending is in a different currency from the bond.
• Credit risk. Without a domestic regulator, investors rely on documentation, ratings and courts to protect their claims.
• Liquidity risk. Smaller issues can trade rarely, and spreads widen sharply in market stress.

In European policy debates, "eurobonds" also refers to proposed bonds issued jointly by eurozone governments, with all members standing behind the debt. Full mutualised eurobonds have not been created, though the European Union began large-scale common borrowing in 2021 to fund the NextGenerationEU recovery programme. That debate is separate from the international Eurobond market described here, which covers bonds in many currencies, including the euro itself.

• International Capital Market Association (ICMA)
• Euroclear