The Eurobond is an international bond that was developed out of necessity in the early 1960s. From the onset, it was popularized by the ability to be floated in denominations other than the home currencies of the beneficiary (Malley, 2015). The main driving force for developing the Eurobond was the accumulation of the Dollar currency oversees in the late 1950s. The gathering was mainly attributed to Russian traders fear to transact in American banks due to the then heightened political activities of the cold war. The quest was further boosted by the introduction of a series of The United States financial regulations in the early 1960s that eased dollar banking and borrowing outside the country. All the forces culminated in the first recognized Eurobond being sold in 1963. Ever since, the Eurobond has undergone significant growth and transformations that surpass many financial institutions such as banking and insurance in the market which have been in existence for a significant amount of time (Choudhry, 2008). This paper discusses the reasons why both issuers and investors would wish to use such a financial institution.
Despite the enormous transformation of the Eurobond since its first floating, seven primary characteristics have relatively remained constant encouraging both issuers and investors to adopt it. This international bond is issued in a bearer, non-registered form hence concealing ownership from national authorities. Therefore, it makes it free from governmental financial restrictions (Choudhry, 2008). Secondly, the interest is paid free of withholding tax; this enhances its affordability to the investor while the issuer enjoys a fair lending environment. Thirdly, the bond is underwritten and distributed by an internationally managed group of banks; hence access is enhanced to all parts of the world (Malley, 2015). Fourthly as earlier stated the bond is secure from government regulations; protecting both the issuers and the investor from unfavorable financial and banking regulations and restrictions. Fifth, the bond is unsecured meaning the investor is not discouraged by the hefty security required mostly in the banking sector. Sixth, as a formality, it is listed on the Luxembourg of London stocks exchange although most of the transactions have embraced the more increased and advanced use of electronic funds handling. Lastly, it is cleared through a pan-European system. This system eliminated enhances the handling of paper securities between buyers and sellers which was previously a major challenge (Munves, Fabozzi, & Mann, 2005). Moreover, some positive transformations have also enhanced its preference by both investors and issuers.
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Some of the transformations that have enhanced the Eurobonds resilience on the market include the following. It has widened in the number of currencies in which it was originally issued from the original USA dollar to the Euro, yen, franc among many others. This diversification of denominations has seen many emerging economies join the Eurobond market (Malley, 2015). Another transformation is the setting of the Eurobond standard minimum issue to $500 million. This amount has enabled debut issuance from many growing nation to facilitate large development projects that are currently being carried out. Some of the countries include; Nigeria, Namibia, Kenya, D.R Congo, Senegal, Ivory Coast, and Gabon. Nevertheless, the feature varies depending on the individual's countries needs and economic standings. Still, in African countries, increased interest rates, especially in African countries, has enabled them to sell their bonds at lower interest rates. Consequently, many European nations mainly Spain, Greece, Portugal, and Italy have been depressed by the move (United Nations Conference on Trade and Development, 2016). It is worth noting that the market has attracted not only governments but also private investors. In fact, the pioneers of the bond were from the private sector. Some of the notable beneficiaries include telecommunication companies such as Vodafone, dutch Telekom and French Telecom (Malley, 2015).
It is clear from the discussion that the Eurobonds popularity as a financial tool is rapidly growing and attracting new markets especially developing nations. The attractions are mainly because of its high flexibility regarding offering the issuer the freedom to decide the country of issuance. On the other hand, the investors readily enjoy the bonds high liquidity and possession of low per values. As such, the Eurobond market enjoys rapid growth suppressing financial institutions that had existed way before its existence. With the current trend of rapid development in the third world country, the Eurobond market is likely to flourish marking another milestone of revolution. Lastly, it is worth mentioning that not all the nations are enjoying the current development since the discussion reveals that nations such as Portugal, Spain among others are grappling with the increasingly lower interest rates attracted by African countries Eurobond sales.
References
Choudhry, M. (2008). The Eurobond Market. Handbook Of Finance . http://dx.doi.org/10.1002/9780470404324.hof001028
Munves, D., Fabozzi, F. J., & Mann, S. V. (2005). The handbook of fixed income securities: Chapter 19 . New York: McGraw-Hill.
O'Malley, C. (2015). Bonds without borders: A history of the Eurobond market .
United Nations Conference on Trade and Development. (2016). Economic development in Africa: Debt dynamics and development finance in Africa: an overview .
