Ch 12 International Bond Market

Chapter 12 International Bond Market The World’s Bond Markets: A Statistical

Perspective
• The World’s Bond Markets: A Statistical • Exhibit 12.1, below, presents an overview of the
Perspective world’s bond markets
• Foreign Bonds and Eurobonds – Domestic bonds are issued by a borrower domiciled
• Types of Instruments within a country, denominated in the currency of that
country, and traded within the country.
• International Bond Market Credit Ratings – International bonds include foreign bonds and Eurobonds
• Eurobond Market Structure & Practices – At the end of June 2018, the face value of bonds (long-
• International Bond Market Indices term original maturity notes) outstanding in the world was
approximately $114,449.9 billion

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Foreign Bonds and Eurobonds Bearer Bonds and Registered Bonds

• International bond market encompasses two basic • Eurobonds are usually bearer bonds, bonds in
market segments: foreign bonds and Eurobonds which ownership is demonstrated through
– A foreign bond is offered by a foreign borrower to possession of the bond
investors in a national capital market and – Issuer does not keep any records indicating who is the
denominated in that nation’s currency current owner of the bond
• Example: German MNC issuing dollar-denominated bonds
– Bearer bonds are very attractive to investors desiring
to U.S. investors
privacy and anonymity, one reason for this being that
– A Eurobond issue is denominated in a particular they enable tax evasion
currency but sold to investors in national capital
markets other than the country that issued the
• Registered bonds, on the other hand, are bonds
denominating currency whose ownership is demonstrated by associating
• Example: Dutch borrower issuing dollar-denominated bonds the buyer’s name with the bond in the issuer’s
to investors in the U.K., Switzerland, and the Netherlands records
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National Security Regulations Security Regulations That Ease Bond

• Foreign bonds must meet the security regulations Issuance
of the country in which they are issued • Rule 415, instituted by the SEC in 1982, allows
– As such, Yankee bonds must meet the same for shelf registration
regulations as U.S. domestic bonds
– Shelf registration allows an issuer to preregister a
• Many foreign borrowers find this level of securities issue, and then shelve the securities for
regulation burdensome and prefer to raise U.S. later sale when financing is actually needed
dollars in the Eurobond market • Rule 144A, instituted by the SEC in 1990, allows
• Transactional restrictions prohibit offers and sales qualified institutional buyers (QIBs) in the U.S. to
of Eurobonds in the U.S. or to U.S. investors trade in private placement issues that do not
during a 40-day restriction period that allows for have to meet the strict information disclosure
the security to become seasoned in the requirements of publicly traded issues
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Ch 12 International Bond Market

Global Bonds Types of Instruments

• A global bond issue is a very large bond issue
that would be difficult to sell in any one country • Straight fixed-rate issues
or region of the world • Euro-medium-term notes
– Global bond issues were first offered in 1989 • Floating-rate notes
– Simultaneously sold and subsequently traded in • Equity-related bonds
major markets worldwide
– Most have been denominated in the U.S. dollar • Dual-currency bonds
– Portion of a U.S. dollar global bond sold by a U.S.
(foreign) borrower in the U.S. is classified as a
domestic (Yankee) bond and the portion sold
elsewhere is a Eurodollar bond
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Typical Characteristics of International Straight Fixed-Rate Issues

Bond Market Instruments • Straight fixed-rate bonds have a specified
maturity date and fixed coupon payments
– Unlike many domestic bonds, which make
semiannual coupon payments, coupon interest on
Eurobonds is typically paid annually
– Vast majority of new international bond offerings in
any year are straight fixed-rate issues
– Euro, U.S. dollar, British pound sterling, and
Japanese yen have been the most common
currencies denominating straight fixed-rate bonds in
recent years
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Euro-Medium-Term Notes Floating-Rate Notes

• Euro-medium-term notes (Euro-MTNs) are • Floating-rate notes (FRNs) are typically medium-
(typically) fixed-rate notes issued by a term bonds with coupon payments indexed to
corporation with maturities ranging from less some reference rate
than a year to about 10 years – Common reference rates are either three-month or
– Euro-MTNs have a fixed maturity and pay coupon six-month U.S. dollar LIBOR
interest on periodic dates – Coupon payments on FRNs are usually quarterly or
– Unlike a bond issue, in which the entire issue is semiannual and in accord with the reference rate
brought to market at once, a Euro-MTN issue is – First introduced in 1970
partially sold on a continuous basis through an – Attractive option for investors with a strong need to
issuance facility that allows the borrower to obtain preserve the principal value of the investment should
funds only as needed on a flexible basis they need to liquidate the investment prior to the
– First introduced in 1986 maturity of the bonds
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Ch 12 International Bond Market

Equity-Related Bonds Dual-Currency Bonds

• There are two types of equity-related bonds • A dual-currency bond is a straight fixed-rate
1. A convertible bond issue allows the investor to bond issued in one currency that pays coupon
exchange the bond for a predetermined straight interest in that same currency. At maturity, the
fixed-rate bond value
principal is repaid in another currency.
• Floor-value of a convertible bond is its straight fixed-
rate bond value – Coupon interest is frequently at a higher rate than
comparable straight fixed-rate bonds
2. Bonds with equity warrants can be viewed as
straight fixed-rate bonds with the addition of a call – Amount of the dollar principal repayment at maturity is
option (or warrant) feature set at inception; frequently, the amount allows for
• Warrant entitles the bondholder to purchase a certain
some appreciation in the exchange rate of the
number of equity shares in the issuer at a prestated stronger currency
price over a predetermined period of time – Japanese firms have been big issuers of dual-
currency bonds
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International Bond Market Credit Ratings S&P’s Sovereign Rating Framework

• Fitch Ratings, Moody’s Investors Service, and S&P
Global Ratings (S&P) have for years provided
credit ratings on domestic and international bonds
and their issuers
– Ratings are based on an analysis of current information
regarding the likelihood of default and the specifics of the
debt obligation
– Ratings reflect both creditworthiness and exchange rate
uncertainty

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Eurobond Market Structure and Practices Eurobond Market Structure and Practices (Continued)
• Primary market • Secondary market
– A borrower deciding to raise funds by issuing Eurobonds to – Eurobonds initially purchased in the primary market from a
the investing public will contact an investment banker and member of the selling group may be resold prior to their
ask it to serve as the lead manager (i.e., bookrunner) of an maturities to other investors in the secondary market
underwriting syndicate that will bring the bonds to market – Secondary market for Eurobonds is an OTC market with
– Lead manager may invite co-managers to form a managing principal trading in London
group to help negotiate terms with the borrower, ascertain – Comprises market makers and brokers connected by an
market conditions, and manage the issuance array of telecommunications equipment
– Managing group, with other banks, will serve as – Market makers stand ready to buy or sell for their own
underwriters, committing their own capital to buy the issue account by quoting two-way bid and ask prices, and they
from the borrower at a discount from the issue price can trade directly with one another, through a broker, or with
– Discount, or underwriting spread, is usually 2% - 2.5% retail customers
– Selling group will sell bonds to the investing public – Bid-ask spread represents the only profit to market makers
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Ch 12 International Bond Market

Clearing Procedures Clearing Procedures (Continued)

• Eurobond transactions in the secondary market
require a system for transferring ownership and • Both systems operate in a similar manner:
payment from one party to another – Each clearing system has a group of depository
• Two major clearing systems, Euroclear and banks that physically store bond certificates
Clearstream International, have been – Members of either system hold cash and bond
established to handle most Eurobond trades accounts. When a transaction is conducted,
1. Euroclear is based in Brussels and is operated electronic book entries are made that transfer
by Euroclear Bank book ownership of the bond certificates from the
2. Clearstream is located in Luxembourg and was seller to the buyer and transfer funds from the
established in 2000 through a merger of two purchaser’s cash account to the seller’s
other clearing firms
– Physical transfer of the bonds seldom takes place
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International Bond Market Indexes

• There are several international bond market
indices, some of the best known being those
produced by J.P. Morgan
• Developed market indexes include the following:
– J.P. Morgan Government Bond Index series
– Economic and Monetary Union (EMU) Government
Bond Index
• Emerging market indexes include the following:
– Government Bond Index-Emerging Markets
– Corporate Emerging Markets Bond Index

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