In the long-term securities market, there is a special type of debt obligation called Eurobonds. Borrowers for them are governments, large corporations, international organizations and some other institutions interested in attracting financial resources for a sufficiently long period and at the lowest cost. For the first time these instruments appeared in Europe and were called eurobond, in connection with which today they are often called "Eurobonds". What are these bonds, how are they issued and what advantages do they give each participant in this market? We will try to cover the answers to these questions in detail and clearly in the article.
The concept and main characteristics of Eurobonds
In simple words, we can say that these are bonds issued in a currency different from the national currencies of the lender and the borrower, and placed simultaneously on the markets of several countries (except for the issuing country). They are intended, as a rule, to raise funds for the long term - up to 40 years. There are short-term Eurobonds issued for a year-three-five, and medium-term - for a period of ten years.
Eurobonds market participants
There are special institutions that place Eurobonds. What are these structures? This is an international syndicate of underwriters, which includes financial institutions from different countries. In this case, national legislation regulates their release and turnover in a limited manner. There are also issuers (governments, international and national structures) and investors (financial structures - insurance companies, pension funds, etc.). All members are members of the International Capital Market Association (ICMA), a self-regulatory organization based in Zurich. Clearstream and Euroclear are used as depository clearing systems.
There is a special Directive of the Commission of the European Communities, which gives a full official definition of this instrument, governs the rules and procedure for offering emissions on the market. According to it, Eurobonds are traded securities with a number of characteristics:
- the need for them to undergo underwriting procedures and their placement through a syndicate, at least two of whose members belong to different states;
- their offer is carried out in large volumes on the markets of several countries (but not in the country of the issuer);
- initially acquired through a credit institution or other approved financial institution.
Properties of Eurobonds
Eurobonds - what are these papers and what characteristic features do they possess? Firstly, each Eurobond has a coupon that provides the investor with the right to receive interest on bonds at a specific time. Secondly, the interest rate can be either fixed or floating (depending on various factors). Thirdly, the payment of the stipulated interest may be made in a currency different from the one in which the loan was attracted. This is called double denomination. In addition, it is important to know a number of other features of such papers, namely:
- these are bearer securities;
- placed simultaneously in several markets;
- issued for a long period - usually 10-30 years (up to 40 inclusive);
- the currency in which the loan is raised is foreign to both the issuer and the investor;
- the face value of the Eurobonds has a dollar equivalent;
- interest on coupons is paid without tax deduction;
- Eurobonds are issued by an issuing syndicate, which includes banks, brokerage and investment companies in several countries.
Eurobonds are one of the most reliable financial instruments, and therefore their buyers are usually such financial institutions as investment companies, pension funds, and insurance organizations.
The history and appearance of the Eurobond market
The issue of Eurobonds according to the classic placement scheme was first implemented in Italy in 1963. The issuer was the state road construction company Autostrade. 60 thousand bonds with par value of $ 250 each were placed. Precisely because Eurobonds initially appeared in Europe, and to this day the bulk of their trade is carried out there, the name of the paper has the prefix "euro". Today it is more a tribute to tradition than a real characteristic of an instrument.
Active development of this market took place in the 80s. Then bearer Eurobonds were especially popular. Later, in the 90s, they began to be “oppressed” by euronotes - medium-term registered bonds issued by developed countries and having security (unlike Eurobonds). This was due to the growth of market capitalization and the strengthening of the status of major borrowers. Then their share in the total issue of Eurobonds reached 60%.
At the end of the 20th century, large bond loans called “jumbos” appeared on the market. The liquidity of Eurobonds has increased, and interest in this financial instrument has grown among the largest borrowers represented by US government agencies and national entities. In addition, due to the global crisis and default on loans from several South American governments, the role of bond loans has increased compared to bank loans. The so-called “flight to quality” process has taken place, when investors prefer safe investments rather than high-yield investments with a rather serious risk.
Eurobonds today
Today, Eurobonds are in no less demand. The main goal of issuers entering this market is to search for alternative sources of financial resources (along with traditional domestic, in particular, bank loans), as well as diversification of loans. In addition, there are a number of advantages that Eurobonds have. What are these "profits"? Firstly, cost savings associated with raising capital (can reach 20%). Secondly, there are fewer kinds of legal formalities and obligations undertaken by the issuer. Thirdly, there are practically no restrictions on the directions and forms of use of funds, market flexibility, etc.
Issue and circulation of Eurobonds
There are various options for placing Eurobonds, the most common being open subscription. It is carried out through the syndicate of underwriters, and the issues are listed on the exchange. After the initial sale, they are “thrown” by dealers into the secondary market, where they can be purchased by telephone and online from investment companies. Like any investment tool, Eurobonds have quotes and returns on them, which depend on supply and demand in the market. However, there is another option for the issue - limited placement among a certain circle of investors. In this case, the bonds are not traded on the exchange (do not have a listing).
Eurobonds of Russia: current situation
For the first time, our country entered the international market of Eurobonds in 1996. The first issues of bonds of this type were carried out during the years 96-97. Then the right to place them subject to a number of conditions was received by two constituent entities of the federation - Moscow and St. Petersburg. Today, the largest corporations in the country are participants in this market: Gazprom, Lukoil, Norilsk Nickel, Transneft, Russian Post, MTS, Megafon. Eurobonds of Sberbank, VTB and Gazprombank, Alfa Bank, Rosbank and others also play a significant role. It is important to note that for Russian companies, entry into the Eurobond market is limited by national legislation. So, joint-stock companies can attract financing using this tool in an amount not exceeding the amount of their authorized capital. There are also restrictions on the issue of unsecured Eurobonds (usually a security deposit is required) and other rules. You can find out the reliability of Russian issuers according to specialized rating agencies such as Moody's, Standard & Poor's and others.
Russia annually is present on the international borrowing market. Despite the fact that the country has enough of its own sources of financing, according to the Minister of Finance, this is an important event in the framework of the Russian budget policy. In 2014, one or two exits to the foreign market are planned with Eurobonds in dollars and euros totaling $ 7 billion (presumably).
Ukrainian Eurobonds: buy and burn out
Russia participates in this system not only as an issuer, but also as an investor. In December last year, Russia bought Ukraine Eurobonds totaling $ 3 billion, becoming the only buyer of this issue. However, such an investment may not turn out for the country in the best way. Since February of this year, S&P and Fitch have repeatedly downgraded the rating of Ukrainian Eurobonds. What does this mean? The bond rating reached the level of CCC (pre-default), their value on the market decreased, and the probability of default on them increased. At the same time, Russia may demand early repayment of the debt, but its position on this issue is weak. Due to negative trends in the Ukrainian economy, the Russian Federation will not be easy to prove that she did not suspect about the possibility of default, the risks of which were spelled out in a 200-page prospectus. Ukraine’s refusal to meet its obligations has very unpleasant consequences for the country itself, related to the deterioration of its credit history in the international market, the seizure of property of its paper holders abroad and the inability to enter the debt market of Eurobonds for a long time. Therefore, in the interests of both parties a positive resolution of the issue of bond debt.
Conclusion
Thus, Eurobonds are very reliable, as a rule, long-term investment instruments that allow attracting financing in the international capital market. They are housed through specially created syndicates and regulated by supranational structures. Rating agencies play a great role in the Eurobond market, which determine the reliability of financial instruments of a country. Today, Russia is an active participant in the international Eurobond market, acting on it as an issuer and investor.