Professional Documents
Culture Documents
(C) Eurobonds.
Amoco Canada issues bonds to be placed internationally.
Issue is underwritten by an international syndicate of securities houses.
Issue is denominated in any currency. ¶
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1.B Type of Instruments
• Examples
Every year the Autostrada paid USD 13.75 to bondholders, for 10 years.
First Eurobond.
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Example XII.4: Zero-coupon bonds ("zeros").
Zero June 1984 PepsiCo Overseas USD bond
At the time the notes were offered (3/84), 6-mo. LIBOR was 10(7/16)%
Afterward, at the end of each 6-mo. period the interest rates on the notes are
updated to reflect the current 6-mo. LIBOR rate for dollars. ¶
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Example XII.7: Convertible bonds ("convertibles").
8% 2002 Cantim (a Canadian co.) convertible USD eurobond.
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Example XII.9: Bonds with equity warrants.
4% 1995 Cannon Euro-USD bonds with equity warrants attached.
Almost all Japanese Euro-USD bond with equity warrant attached (USD
Eurowarrants) have similar terms. ¶
Note: Dual-currency bonds are purchased in terms of one currency but pay
coupons or repay principal at maturity in terms of a second currency.
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At the time of the issue, this bond represented a combination of
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II. Eurobond Markets
Example: a Malayan firm deposits USD not in the U.S. but with a bank
outside the U.S., for example in Singapore or in Switzerland.
• Euromarket:
offshore money market
low costs and lack of regulations
instruments traded in any currency.
OVH-12.7
2.B Characteristics of Eurobonds
Basic characteristics:
a Eurobond is transferable (usually bearer).
a Eurobond is intended to be tradeable.
a Eurobond is a medium- to long-term debt security.
a Eurobond is generally launched through a public offering.
a Eurobond is generally listed on a stock exchange.
Example: The World Bank has issued in the U.S. foreign bond market and
in Euromarkets. Issues of similar maturity have yielded 10 to 20 bps less.
OVH-12.8
II. Issue Procedures in the Eurobond Market
Exhibit XII.2
Role players in a new eurobond issue
Issuer of bonds Banking syndicate
Managing group
Underwriters
Selling group
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Investors
OVH-12.10
2.B.1.ii Selecting a Lead Manager
Example XII.11:
A French company issues USD 1,000 bonds at 100 (100% of
FV, "par").
Managing group pays the borrower USD 975 for each USD
1,000 bond.
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• Syndicate members really receive the full flotation cost if
the bonds are actually sold to retail at the issue price. This
might not happen.
Reasons:
(i) unforceable contracts.
(ii) competition.
(iii) price discrimination.
Example:
Lead manager pays borrower USD 975 per USD 1,000 bond.
Lead manager makes bonds available to underwriters at
USD 980
Lead manager makes bonds available to sellers at USD 985
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2.B.1.iv Traditional Time Schedule for a New Offering
Exhibit XII.3
Timetable of New Eurobond Offering
Syndicate stabilization
(Two weeks)
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2.B.1.v Gray Market
"I could sell these now for 1%, I would lock in a .5% profit."
"I could avoid the risk that interest rates (and bond prices!)
will change."
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2.B.1.vi Variations on Issuing Procedure
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20% of new eurobonds are issued under FPRO terms.
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2.B.2 U.S. Legal Aspects of Eurodollar Bond Issues
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no U.S. withholding tax on payments to foreigners who
hold U.S. government or corporate bonds.
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2.C.1 Eurobond secondary market
• History:
TABLE XII.C
Geographical Breakdown of ISMA Members
Locality Number of members
U.S. 48
Belgium 33
Far East 33
France/Spain 52
West Germany/Austria 57
Italy 26
Luxembourg 63
Middle East 33
Netherlands 47
Scandinavia 55
Switzerland 141
U.K. 219
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Public Eurobond issues are listed on one or more stock
exchanges.
⇒ OTC market.
• Microstructure:
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• Two international securities clearing systems (now linked):
• Liquidity problems:
The bigger the size of the issue, the more liquid in the
secondary market:
⇒ Issue tend to have sizes larger than USD 50 million
equivalent.
• Volume:
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Turnover denominated in USD weakened:
1979: 90%
1990: 38%
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III. Foreign Bond Markets
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• Japanese and non-Japanese corporations make public
Euroyen issues
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3.D Swiss Franc International Bonds
4.B. Dealing
U.S. domestic market: OTC with some bonds are listed (at
NYSE).
Market makers and brokers.
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Brokers.
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4.C Quotations
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4.D Yields
This simple yield understates the true YTM for bonds priced
over par and overstates the yield for bonds priced below
par.
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Example XII.22: A Japanese bond with:
Years to maturity: 5 years.
C = 12%.
P= 95.
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4.E Some Legal Aspects
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