The eurobond is a bond issued in a currency different from that of the country or market where it is issued. Despite its name, it has no specific connection to Europe or the euro currency. These bonds are also known as external bonds due to their external currency characteristic.
The ‘euro’ in eurobond implies external. Eurobonds (small ‘e’) should not be confused with Eurobonds with a capital ‘E’, which are bonds issued by the European Union and European governments. Key Takeaways: A eurobond issue can finance a company’s expansion into a foreign market. It raises money in the needed currency without forex risk. An investor can gain exposure to a foreign market while investing in an established domestic company. The names of eurobonds reflect the currency they are denominated in. For example, a U.K.-based company might issue a U.S. dollar-denominated eurodollar bond in Japan. Or an international financial syndicate could issue euroyen bonds in Singapore denominated in Japanese yen. Who Issues Eurobonds? Private organizations, international syndicates, and even governments needing foreign-denominated money for a specified time find eurobonds suitable. Eurobonds are usually offered at fixed interest rates even for long periods. An Example: For instance, if a company like Molson Coors wants to enter a new market by establishing a manufacturing facility in India. The expenses for the facility require a large amount of capital in the local currency, the Indian rupee (INR). As it is new to India, the company may not have the necessary credit in the Indian markets, leading to high borrowing costs locally. Molson Coors decides to source money locally and issues a rupee-denominated eurobond in the U.S. Investors with Indian rupees in their U.S.-based accounts can purchase the bond, loaning money in Indian rupees to the company. The eurobond is denominated in a foreign currency but launched in a nation with a strong currency, making it highly liquid for investors. The North American company collects this capital and floats a subsidiary company locally in India. The collected capital in rupees is transferred to the local Indian subsidiary by the parent company. The plant becomes operational, and the proceeds are used to pay interest to bondholders. Benefits of Eurobonds for the Issuer: There are several benefits to issuing eurobonds instead of domestic bonds for such a project. Companies can issue bonds in the country and currency of their choice depending on what is most beneficial for the planned use. The issuer can choose a country with a favorable interest rate at the time of issue, reducing borrowing costs. Eurobonds have particular appeal to certain investor populations.Eurobonds are issued in a particular country but traded globally, attracting a large investor base. For example, many U.K. residents with roots in India, Pakistan, and Bangladesh view investments in their homelands favorably. A company issuing eurobonds reduces forex risk. In an example, the company could issue domestic bonds in the U.S. in U.S. dollars, convert the amount to Indian rupees at prevailing rates to move it to India, then exchange rupees for U.S. dollars to pay interest to bondholders. This process adds transactional costs and forex rate risk.
Benefits of Eurobonds for Investors: Eurobonds offer diversification with a smaller degree of risk for the investor. They are investing in a solid and familiar local company expanding its business into an emerging market. Also, eurobonds are denominated in foreign currencies but launched in nations with strong currencies, making them highly liquid for local investors. For example, an Indian rupee eurodollar bond issued in the U.K. with a par value of 10,000 Indian rupees will cost a U.K. investor the equivalent of about 92 British pounds at the prevailing exchange rate as of October 24, 2024.