Both Euro bonds and Euro credit (Euro currency) financing have their advantages and disadvantages. For a given company, under specific circumstances, one method of financing may be preferred to the other. The major differences are:
1. Cost of borrowing
Euro bonds are issued in both fixed rate and floating rate forms. Fixed rate bonds are an attractive exposure management tool since the known long-term currency inflows can be offset by the known long-term outflows in the same currency. In contrast, Euro currency loans carry variable rates.
2. Maturity
Euro bonds have longer maturities while the period of borrowing in the Euro currency market has tended to lengthen over time.
3. Size of the issue
Earlier, the funds available for lending at any time have been much more in the inter-bank market than in the bond market. But of late, this situation does not hold true. Moreover, although in the past the flotation costs of a Euro currency loan have been much lower than a Euro bond (about 0.5 % of the total loan amount versus about 2.25 % of the face value of a Euro bond issue), compensation has worked to lower Euro bond flotation costs.
4. Flexibility
In a Euro bond issue, the funds must be drawn in one sum on a fixed date and repaid according to a fixed schedule, unless the borrower pays a substantial prepayment penalty. By contrast, the drawdown in a floating rate loan can be staggered to suit the borrower’s needs and can be repaid in whole or in part at any time, often without penalty. Moreover, a Euro currency loan with a multi-currency clause enables the borrower to switch currencies on any roll-over date, whereas switching the denomination of a Euro bond from currency A to currency B would require a costly, combined, refunding and reissuing operation.
5. Speed
Funds can be raised by a known borrower very quickly in the Euro currency market. Often, a period of two to three weeks should suffice. A Euro bond financing generally takes more time, though the difference is becoming less significant.
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