INTERNATIONAL BONDS
INTERNATIONAL BONDS
Many countries have very active bond markets available to domestic and foreign investors. One good example is the United States: In mid-1980s, given the high real interest rates, relative political and economic stability, and governmental desire to finance its high budget deficits with borrowing, the U.S. market was attractive to foreign investors. The repeal of the withholding tax on interest in the United States in 1984 also eliminated a major roadblock for foreign investors taking U.S.-issued bonds.
Foreign Bonds and Eurobonds
The international bond market can be divided into foreign bonds and Eurobonds. Foreign bonds are sold outside of the borrower's country but are denominated in the currency of the country of issue. For example, a French corporation floating a bond issue in Swiss francs in Switzerland jwould be floating a foreign bond. A Eurobond is usually underwritten, or placed in the market for the borrower, by a syndicate of banks from different countries and placed in countries other than the one in whose currency the bond is denominated. If the French firm floated a bond issue in German marks in
Switzerland, Luxembourg, and London, the issue would be a Eurobond.
The Eurobond Market
Although the Eurobond market is centered in Europe, it has no national boundaries. Unlike most conventional bond issues, Eurobonds are sold simultaneously in several financial centers through multinational underwriting syndicates and are purchased by an international investing public that extends far beyond the confines of the countries of issue.
Occasionally, Eurobond issues may provide currency options, which enable the creditor to demand repayment in one of several currencies and thereby reduce the exchange risk inherent in single-currency foreign bonds. More frequently, however, interest and principal on the bonds are payable in U.S. dollars. Over the last several years the Eurobond market has become a market for dollar-denominated obligations of foreign as well as U.S. borrowers that are purchased by non-U.S. investors.
In an effort to broaden investor appeal, corporate borrowers increasingly have shifted from straight debt issues to bonds that are convertible into common stock. The option of conversion rests with the holder of the convertible issue. For the nonresident investor, one of the main attractions of a convertible issue is that it usually offers a larger current return than does the dividend of the underlying stock.
In the past decade, the Eurobond market has grown explosively, due to a variety of reasons—primarily the deregulation of markets. The weakening of the dollar in 1985 also caused a shift out of dollars toward Euro-Yen and Euro-Deutsche mark issues. The control of inflation in the industrial countries
also has resulted in a big demand for financial assets, allowing companies to issue bonds in unprecedented quantities and in a variety of currencies. The major benefits of the Eurobond market are that it is relatively unregulated, its income is essentially untaxjgfL-aqd there appears to be greater flexibility in making issues than is the casFin purely national markets. In addition, it is an important step toward a fully integrated European capital market. The yen is potentially the largest source of funds for the Eurobond market, because of the huge trade surpluses that Japan has enjoyed in recent years.
The European Currency Unit (ECU) has become an interesting "currency" of lending in the Eurobond market. The ECU, which is based on a basket comprised of the currencies of the EC, accounts for nearly 10 percent
Qf ap, international bond issues.7 It is attractive in that it allows borrowers to
diversify into different currencies and allows them to use cash flows from
different countries where it has operations to pay back the investors. Corpo-
rate borrowers include Citicorp, PepsiCo, Peugeot, Olivetti, and Toyota.8
Although the Eurobond market grew by 20 percent in 1989 over 1988 to $212.7 billion, it still remained below the U.S. bond market at $275.0 billion but above the Japanese bond market at $80 billion. The Eurobond market is very important because of its ability to place issues more cheaply and efficiently than domestic markets. In 1989 private corporate borrowers raised their share in total borrowing to 58.8 percent of the market, up from 38.1 percent in 1985. The other major borrowers are governments, private banks, and supranational agencies (such as the different agencies of the European Community). In terms of currency, the largest volume of Eurobond denominations is clearly dollars, followed by sterling, deutsche marks, yen, and ECU's. To illustrate the magnitude of difference in the different currencies, in the 11 months to end-November 1989, new issues in the Eurodollar market stood at $115.3 billion, whereas in the Euro-Sterling market, the next-largest market, they stood at only $19.7 billion.9
The major challenge facing the Eurobond market in the future is the deregulation of capital markets. As domestic markets deregulate, there is the possibility that the Eurobond market may become increasingly unnecessary.10 In the early part of 1990, the Eurobond market fell to half its level in the previous year, so perhaps the problems of the market were beginning to take hold. A major contributor was the collapse of the Japanese stock market in early 1990 and the hesitancy of the large Japanese securities firms to enter the Eurobond market. However, there was no way of knowing if the slowdown in early 1990 was a temporary or a permanent condition.
Many countries have very active bond markets available to domestic and foreign investors. One good example is the United States: In mid-1980s, given the high real interest rates, relative political and economic stability, and governmental desire to finance its high budget deficits with borrowing, the U.S. market was attractive to foreign investors. The repeal of the withholding tax on interest in the United States in 1984 also eliminated a major roadblock for foreign investors taking U.S.-issued bonds.
Foreign Bonds and Eurobonds
The international bond market can be divided into foreign bonds and Eurobonds. Foreign bonds are sold outside of the borrower's country but are denominated in the currency of the country of issue. For example, a French corporation floating a bond issue in Swiss francs in Switzerland jwould be floating a foreign bond. A Eurobond is usually underwritten, or placed in the market for the borrower, by a syndicate of banks from different countries and placed in countries other than the one in whose currency the bond is denominated. If the French firm floated a bond issue in German marks in
Switzerland, Luxembourg, and London, the issue would be a Eurobond.
The Eurobond Market
Although the Eurobond market is centered in Europe, it has no national boundaries. Unlike most conventional bond issues, Eurobonds are sold simultaneously in several financial centers through multinational underwriting syndicates and are purchased by an international investing public that extends far beyond the confines of the countries of issue.
Occasionally, Eurobond issues may provide currency options, which enable the creditor to demand repayment in one of several currencies and thereby reduce the exchange risk inherent in single-currency foreign bonds. More frequently, however, interest and principal on the bonds are payable in U.S. dollars. Over the last several years the Eurobond market has become a market for dollar-denominated obligations of foreign as well as U.S. borrowers that are purchased by non-U.S. investors.
In an effort to broaden investor appeal, corporate borrowers increasingly have shifted from straight debt issues to bonds that are convertible into common stock. The option of conversion rests with the holder of the convertible issue. For the nonresident investor, one of the main attractions of a convertible issue is that it usually offers a larger current return than does the dividend of the underlying stock.
In the past decade, the Eurobond market has grown explosively, due to a variety of reasons—primarily the deregulation of markets. The weakening of the dollar in 1985 also caused a shift out of dollars toward Euro-Yen and Euro-Deutsche mark issues. The control of inflation in the industrial countries
also has resulted in a big demand for financial assets, allowing companies to issue bonds in unprecedented quantities and in a variety of currencies. The major benefits of the Eurobond market are that it is relatively unregulated, its income is essentially untaxjgfL-aqd there appears to be greater flexibility in making issues than is the casFin purely national markets. In addition, it is an important step toward a fully integrated European capital market. The yen is potentially the largest source of funds for the Eurobond market, because of the huge trade surpluses that Japan has enjoyed in recent years.
The European Currency Unit (ECU) has become an interesting "currency" of lending in the Eurobond market. The ECU, which is based on a basket comprised of the currencies of the EC, accounts for nearly 10 percent
Qf ap, international bond issues.7 It is attractive in that it allows borrowers to
diversify into different currencies and allows them to use cash flows from
different countries where it has operations to pay back the investors. Corpo-
rate borrowers include Citicorp, PepsiCo, Peugeot, Olivetti, and Toyota.8
Although the Eurobond market grew by 20 percent in 1989 over 1988 to $212.7 billion, it still remained below the U.S. bond market at $275.0 billion but above the Japanese bond market at $80 billion. The Eurobond market is very important because of its ability to place issues more cheaply and efficiently than domestic markets. In 1989 private corporate borrowers raised their share in total borrowing to 58.8 percent of the market, up from 38.1 percent in 1985. The other major borrowers are governments, private banks, and supranational agencies (such as the different agencies of the European Community). In terms of currency, the largest volume of Eurobond denominations is clearly dollars, followed by sterling, deutsche marks, yen, and ECU's. To illustrate the magnitude of difference in the different currencies, in the 11 months to end-November 1989, new issues in the Eurodollar market stood at $115.3 billion, whereas in the Euro-Sterling market, the next-largest market, they stood at only $19.7 billion.9
The major challenge facing the Eurobond market in the future is the deregulation of capital markets. As domestic markets deregulate, there is the possibility that the Eurobond market may become increasingly unnecessary.10 In the early part of 1990, the Eurobond market fell to half its level in the previous year, so perhaps the problems of the market were beginning to take hold. A major contributor was the collapse of the Japanese stock market in early 1990 and the hesitancy of the large Japanese securities firms to enter the Eurobond market. However, there was no way of knowing if the slowdown in early 1990 was a temporary or a permanent condition.
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