Euro Bond: issue is one denominated in a particular currency but sold to investors in national capital markets other than the country that issued the denominating currency. An example is a Dutch borrower issuing DM-denominated bonds to investors in the UK, Switzerland and the Netherlands.
The Eurobond market is the largest international bond market, which is said to have originated in 1963 with an issue of Eurodollar bonds by Autostrade, an Italian borrower. The market has since grown enormously in size and was worth about $ 428 billion in 1994.
Eurobond markets in all currencies except the Japanese Yen are quite free from any regulation by the respective governments.
Straight bonds are priced with reference to a benchmark, typically treasury issues. Thus a Eurodollar bond will be priced to a yield a YTM (Yield-to-Maturity) somewhat above the US treasury bonds of similar maturity, the spread depending upon the borrowers ratings and market conditions.
Floatation costs of the Eurobond are comparatively higher than costs indicated with syndicated Eurocredits.
Primary market: A borrower desiring to raise funds by issuing Euro bonds to the investing public will contact an investment banker and ask it to serve as lead manager of an underwriting syndicate that will bring the bonds to market. The underwriting syndicate is a group of investment banks, merchant banks, and the merchant banking arms of commercial banks that specialize in some phase of public issuance. The lead manager will usually invite co managers to form a managing group to help negotiate terms with the borrower, ascertain market conditions and manage the issuance.
The managing group along with other banks, will serve as underwriters for the issue, that is, they will commit their own capital to buy the issue from the borrower at a discount from the issue price, if they are unable to place the bonds with investors. The discount or the underwriting spread is typically in the 2 or 2.5% range. Most of the underwriters along with other banks will be a part of the placement or selling group that sells the bonds to the investing public.
The total elapsed time from the decision date of the borrower to issue Eurobonds until net proceeds from the sale are received is typically 5 to 6 weeks.
The lead manager prepares a preliminary prospectus focusing on economic and financial characteristics of the project and financial standing of the borrower.
After having consulted a certain number of banks, the lead manager decides on the interest rate. Subsequently, the issue price is fixed. Clauses of reimbursement before maturity are provided for. After, the issue advertising is done in International Press in the form of tombstone. This tombstone indicates the lead manager, co-lead managers and members of the guarantee syndicate.
Secondary Market: Eurobonds purchased in the primary market can be resold before their maturities in the secondary market. The secondary market is an over the counter market with principal trading in London. However, important trading is also done in other major European cities. The bonds are quoted in percentage of their value, without taking into account the coupon already running.
The secondary market comprises of market makers and brokers. Market makers stand ready to buy or sell for their own account by quoting a two way bid and ask prices. Market traders trade directly with one another, through a broker, or with retail customers. The bid-ask is their only profit. Brokers accept buy or sell orders from market makers and then attempt to find a matching party for the other side of the trade; they may also trade for their own account. Brokers charge a small commission to the market makers that engaged them. They do not deal directly with retail clients.
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