Eurobonds

The phrase "syndicated tranches of eurobonds" sounds extremely complex and technical, but behind this financial terminology lie fairly understandable mechanisms for raising money on the international market. Let's walk through each element of this construction in turn.

What eurobonds are

Definition and essence

A eurobond is a bond issued in a currency that is foreign to the issuer. The key difference between a eurobond and an ordinary bond is that it is placed on the international market among foreign investors, for whom the currency of issue is likewise foreign.

The "euro" prefix in the name is a nod to tradition, since the first such bonds appeared in Europe in 1963. Despite the name, eurobonds are not necessarily issued in a European currency, and are not necessarily placed only in Europe. They are international debt instruments, traded on the global financial market.

The first issue and its history

Historically, the first classic eurobond issue took place in 1963. The issuer was the Italian state road-building company Autostrade, which placed 60,000 bonds with a face value of $250 each. Notably, this was an Italian issuer selling bonds denominated in US dollars to European investors — the classic scheme that came to define the essence of eurobonds.

Examples of dollar-denominated loans in Europe already existed before this, but it was the Autostrade issue that became the model placement scheme underlying the modern eurobond market.

Who issues eurobonds

Eurobond issuers include various borrowers interested in raising funds for a long period:

• International organizations (the World Bank, the European Bank for Reconstruction and Development, and others)
• The governments of sovereign states
• Local authorities (regional governments, municipalities)
• Large corporations with an international reputation
• Financial institutions and banks

Eurobond borrowing terms range from 1 to 40 years, though issues of 3 to 30 years are most common. This makes eurobonds an instrument of long-term financing.

The main features of eurobonds

Eurobonds have a number of distinctive features that make them a unique financial instrument:

• Bearer form: eurobonds are bearer securities, which ensures the owner's anonymity and simplifies their transfer
• International placement: can be placed simultaneously in the markets of several countries
• Foreign currency: the currency of the loan is foreign to both the issuer and most investors
• Dollar denomination: the face value is most often expressed in US dollars, though other currencies are possible
• Tax advantages: coupon interest is paid to the holder in full, without withholding tax at source, unlike ordinary bonds
• Coupon payments: eurobonds carry coupons entitling the holder to interest at agreed dates

The official definition of euro-securities

The official definition of euro-securities is given in the Directive of the Commission of the European Communities of April 17, 1989 (Council Directive 89/298/EEC), which regulates the offering of new issues on the European market. Under this Directive, euro-securities are tradable securities with the following characteristic features:

1. They undergo underwriting and are placed through a syndicate, at least two of whose members are registered in different states
2. They are offered in significant volumes in one or more states other than the issuer's state of registration
3. They can initially be acquired only through the intermediation of a credit institution or other financial institution

Syndicated placement

What an underwriting syndicate is

Syndicated placement is a method of issuing securities in which placement and underwriting are carried out by an issuing syndicate. A syndicate is a temporary association of financial institutions, formed specifically to organize and carry out a particular bond issue.

An issuing syndicate typically includes:

• Investment banks
• Investment companies
• Brokerage firms from several countries

A key feature of the syndicate is its international character. Financial institutions from different countries are necessarily represented within it, ensuring broad geographic reach and access to different groups of investors.

The syndicate's structure

A certain hierarchy and division of roles exists within a syndicate:

The Lead Manager

This is the issue's main organizer, who coordinates all the syndicate's work. The lead manager bears the primary responsibility for the placement's success, and usually takes on the largest share of the bonds. After placement, the lead manager becomes the market maker in the secondary market — that is, it commits to maintaining liquidity for the issued bonds by posting buy and sell quotes.

Co-Managers

These are other major syndicate members, who also take on significant volumes of the bonds and actively participate in placing them with investors.

Underwriters

Syndicate members who guarantee the purchase of a certain volume of bonds. Underwriting can be firm (the member commits to buying its share regardless of the placement's success) or conditional (the member buys the bonds only if a minimum placement volume is successfully achieved).

Why a syndicate is needed

Syndicated placement offers several important advantages:

• Risk distribution: no single financial institution bears the full weight of the placement; the risk is spread among the syndicate's members
• Broad investor reach: each syndicate member has access to its own client base in various countries and regions
• Expertise: different members bring their expertise in different markets and investor segments
• The ability to handle large placements: a syndicate makes it possible to place very large volumes of bonds that a single bank could not place on its own
• Pricing: the syndicate helps determine a fair price and interest rate, based on aggregate demand from different investor groups

Methods of syndicated placement

There are two main methods for syndicated eurobond placement:

Public Offering

In a public offering, bonds are offered to an unlimited circle of investors. Placement is carried out through a syndicate of underwriters, acting as the loan's managers. Such issues almost always have a listing on an exchange — most often the London Stock Exchange or the Luxembourg Stock Exchange. Listing ensures transparency, and the ability to trade the bonds on an organized market.

Private Placement

Private placement targets a small group of large, usually institutional, investors. Such issues have no exchange listing, and trade on the over-the-counter market. Private placement makes it possible to avoid many regulatory requirements and speed up the fundraising process, but limits the bonds' liquidity.

Tranches in a bond issue

The concept of a tranche

A tranche (from the French tranche — "slice," "portion") is a part of a single bond issue that may have its own particular features. When people speak of "tranches of eurobonds," they mean that a large loan has been divided into several parts.

An issue can be divided into tranches by various criteria:

Time-based tranches

The same issuer may issue bonds of one series, but at different times. For example, the first tranche is placed today, the second in three months, the third in six months. This lets the issuer adapt to changing market conditions, and raise funds as needed.

Tranches with different characteristics

Tranches of a single issue may differ by:

• Maturity: a short tranche of 5 years, a medium one of 10 years, a long one of 20 years
• Interest rate: a fixed-rate tranche and a floating-rate tranche
• Currency: a dollar tranche and a euro tranche
• Repayment priority: a senior tranche (repaid first) and a junior tranche (repaid after the senior one)

Geographic tranches

Bonds can be divided into tranches depending on where they are placed. For example, an Asian tranche is placed among investors in Asia, a European tranche in Europe, an American tranche in the US. This allows the particulars of different markets and the preferences of different investor groups to be taken into account.

Why tranches are needed

Dividing an issue into tranches gives the issuer additional flexibility:

• Targeting different investors: different tranches can be aimed at different types of investors, with different investment horizons and risk requirements
• Optimizing the cost of borrowing: the issuer can offer different terms to different market segments, getting the best conditions in each
• Managing volume: the ability to split a large loan into parts and raise funds gradually
• Reducing risk: if one tranche meets weak demand, the other tranches can compensate for it

Syndicated tranches of eurobonds: the full picture

Putting all the elements together

Now that each element has been explained separately, a full picture can be drawn of what "syndicated tranches of eurobonds" means.

It means that:

1. The issuer issues eurobonds — international debt obligations in a foreign currency
2. The issue is divided into tranches — parts with different characteristics, or intended for different markets
3. Placement is carried out through a syndicate — a group of international financial institutions jointly organizing and guaranteeing the placement

A practical example

Imagine a large Russian company decides to raise $500 million through a eurobond issue. The company approaches a major international investment bank, which agrees to act as lead manager. The bank forms a syndicate of 10 financial institutions from the US, Europe, and Asia.

The issue is split into three tranches:

• Tranche A: $200 million, 5-year term, fixed rate of 6%, aimed at European investors
• Tranche B: $200 million, 10-year term, fixed rate of 7%, aimed at American investors
• Tranche C: $100 million, 7-year term, floating rate (LIBOR + 3%), aimed at Asian investors

Each syndicate member commits to placing a certain share of each tranche among its clients. The lead manager coordinates all the work, sets the final placement terms, and arranges for the bonds to be listed on the London Stock Exchange.

Who buys eurobonds

The main buyers of eurobonds are institutional investors:

• Pension funds: seeking reliable long-term investments to fund future payouts to retirees
• Insurance companies: invest insurance reserves in bonds to secure a stable income
• Investment funds: bond funds, balanced funds, and other collective investment vehicles
• Banks: invest their own funds and client funds
• Central banks and sovereign wealth funds: place currency reserves

Trading eurobonds

Primary and secondary placement

Although eurobonds are usually listed on the London or Luxembourg stock exchange, they trade almost exclusively over the counter. This means deals are done directly between market participants, by phone or through electronic trading platforms, rather than through an exchange's order book.

Depository-clearing systems

Settlement of eurobond trades takes place through two main depository-clearing systems:

• Euroclear: founded in 1968, based in Brussels
• Clearstream: formed in 2000 from the merger of the German and Luxembourg systems (previously known as Cedel)

Settlement follows the DVP (Delivery Versus Payment) principle, meaning the simultaneous transfer of securities and funds, eliminating the risk that one side fails to perform.

Eurobonds exist only in book-entry form — there are no physical paper certificates; all rights are recorded electronically by the depositories.

Interest rates on eurobonds

Types of interest rates

Eurobonds can carry various types of interest rates:

Fixed Rate Bonds

The interest rate is set at issuance and remains unchanged for the entire life of the bond. The investor knows in advance exactly what income they will receive.

Floating Rate Notes

The interest rate is periodically reset, usually quarterly. The rate is pegged to a base benchmark, most often LIBOR (the London Interbank Offered Rate), plus a margin or spread.

For example, a rate might be set as "LIBOR + 2%." If the three-month LIBOR rate is 3%, the investor receives 5% annualized for that period. At the next reset, the rate is adjusted to the new LIBOR value.

Sometimes the yield on US Treasury bills, or other market benchmarks, is used as the base instead.

Zero Coupon Bonds

These bonds carry no periodic interest payments. Instead, they are placed at a substantial discount to face value, and redeemed at full face value. The investor's return is the difference between the purchase price and the redemption amount.

Deep Discount Bonds

Similar to zero-coupon bonds, but may carry small coupon payments. Sold at a price well below face value.

Payment frequency

Interest income on eurobonds is usually paid at the end of each interest period. The most common frequency is quarterly or semiannual. For floating-rate bonds, the interest rate is announced at the start of the coupon period.

Options embedded in eurobonds

Many eurobonds include various options in their structure, granting additional rights to either the issuer or the investor:

Bonds with a Call Option

The issuer has the right to redeem the bond early, at predetermined dates. This benefits the issuer if market interest rates have fallen — it can retire the expensive loan and issue a new one at a lower rate.

Bonds with a Put Option

The investor has the right to demand early redemption at predetermined dates. This benefits the investor if interest rates have risen — they can get their funds back and reinvest at a higher rate.

Bullet Bonds

Such bonds are repaid in full only at maturity. This is the simplest and most straightforward structure.

Currency denomination

An interesting feature of some eurobonds is dual-currency denomination. The bond's face value may be expressed in one currency (say, US dollars), while interest payments are made in another (say, euros or Japanese yen).

This lets the issuer and investors manage currency risk, and take advantage of different currency markets.

Requirements for issuers

Credit rating

To access the eurobond market, an issuer needs a credit rating from one or more international rating agencies (Moody's, Standard & Poor's, Fitch). A higher rating makes the loan cheaper, allowing a lower interest rate to be set, since investors see such bonds as less risky.

Legal framework

Eurobonds are usually issued under English law or the law of the State of New York. This is because Anglo-Saxon law is well developed with respect to debt obligations, and enjoys the trust of international investors.

Taxation

One of the important advantages of eurobonds is that interest is paid without deduction of withholding tax at source. The investor receives the interest in full, and then pays taxes independently, under their own country's laws. This simplifies tax administration, and makes eurobonds more attractive to international investors.

Special types of eurobonds

Convertible eurobonds

Some eurobonds can be converted into the issuer's shares, or into other bonds, on predetermined terms. This lets investors participate in a company's growth if things go well, while still retaining the guarantees of a bond.

Dragon Bonds

A special type of Eurodollar bond placed in the Asian market, primarily in Japan. Dragon bonds are listed on an Asian exchange, usually in Singapore or Hong Kong. The name reflects the region's geography and cultural symbolism.

Eurobonds and euronotes

There is a distinction between eurobonds and euronotes, although the two terms are often used interchangeably:

• Eurobonds: bearer securities, deposited with the depositories of trading systems. They are placed on the market mainly by developing countries. No special collateral is reserved against eurobonds, making them convenient for issuers to issue
• Euronotes: registered securities, issued by countries with developed market economies. Unlike eurobonds, issuing euronotes requires the creation of collateral

Ways to access the eurobond market

Direct issuance

The first method involves the company accessing international capital markets directly. The company itself acts as both borrower and issuer. It assumes all obligations under the bonds, and handles all interaction with investors and regulators.

This method is available to large companies with an international reputation and a high credit rating. Direct issuance is usually cheaper in terms of cost, but requires the issuer to meet every international standard of disclosure and corporate governance.

Issuance through an SPV

The second placement method involves using a specially created company — an SPV (Special Purpose Vehicle) — as the issuer. The SPV issues the eurobonds in its own name, but under a guarantee from the real borrowing company.

There are two main variants:

• The SPV as a subsidiary: a subsidiary is created in a jurisdiction convenient for issuing bonds (often an offshore zone or a country with developed financial legislation), which acts as the issuer
• The SPV as an independent structure: an existing specialized issuing company is used, which the borrower approaches

Using an SPV can be advantageous for tax reasons, to simplify legal procedures, or to work around restrictions existing in the borrowing company's home country.

The significance of eurobonds in the international market

The scale of the market

Eurobond loans account for more than 50% of the turnover on the euromarket (the international capital market), and around 90% of the turnover in the euro-securities market. This makes eurobonds the primary instrument of international financing.

Their role in the global economy

Over time, the role of bond financing grew relative to bank lending. This shift was aided by events such as the global debt crisis of the early 1980s, when the governments of Mexico, Brazil, Argentina, and other developing countries defaulted on their loans.

After these events, banks became more cautious about direct lending, and issuers reoriented toward the bond market, where risk is spread across many investors.

Eurobond maturities

Classification by term

Depending on their maturity, eurobonds are classified as follows:

• Short-term bonds: maturing in less than 1 year (relatively rare)
• Medium-term bonds: maturing in 1 to 10 years (the most common segment)
• Long-term bonds: maturing in more than 10 years

Special cases

Although most eurobonds have a term of 3 to 30 years, extreme cases exist. For example, in 1984 the Swedish government placed floating-rate bonds with a 40-year term, maturing in 2024.

There are also "perpetual" bonds, which have no set maturity date. An example is bonds issued by the British bank National Westminster Bank. On such bonds, the issuer pays interest indefinitely, but is not obligated to repay the principal, though it usually retains the right of early call.

Redemption dates

Eurobonds are also classified by their redemption dates:

• Bonds with a single redemption date: the entire sum is repaid at once, at the end of the term
• Bonds with multiple dates: redemption occurs in installments, on various set dates
• Bonds with an early-redemption condition: can be redeemed before the main maturity date if certain conditions are met

Conclusion

So, "syndicated tranches of eurobonds" represents a complex but logically constructed financial instrument. These are international debt obligations, issued in a foreign currency, divided into parts with different characteristics, and placed through a group of international financial institutions among investors around the world.

The eurobond market plays a key role in the global financial system, providing a mechanism of long-term financing for governments, international organizations, and large corporations. Syndicated placement of tranches makes it possible to effectively spread risk, attract different investor groups, and optimize borrowing terms.

For investors, eurobonds offer a way to diversify a portfolio with international instruments, earning income in a foreign currency and benefiting from tax advantages. For issuers, they are a way to raise substantial capital for a long period, at competitive rates, on the global market.