The International Bond Market

Ravi Agarwal
Types of Bond Markets

 Corporate

 Government and agency

 Mortgage backed, asset backed, CDO.
 Funding

 Municipal
Participants

 Institutional Investors
 Governments

 Traders

 Individuals
Types of Bonds

 Foreign Bonds

 Global Bonds

 Eurobonds
Foreign Bonds

Issued in a country's national bond market by

an issuer not domiciled in that country where
those bonds are subsequently traded and
they are denominated in the domestic
currency.

There is no direct exchange rate exposure.

Types of Foreign Bonds

 Yankee bond in the US

 Samurai bond in Japan

 Bulldog bond in the UK

 Rembrandt Bond in Spain

What lead to Global Bond / Eurobond ?

 Introduction of Interest Equalization Tax.

 Restricted financing of FDI by US
corporations
 The Glass-Steagall Act prevented US
commercial banks from issuing and dealing
in bonds.
Global Bonds

Sold simultaneously on several markets in

the currency of each market

First offered by the World Bank, Ontario-

Hydro, and Hydro-Quebec.
Eurobonds (part of Global Bond)

A Eurobond is a bond issued and traded in a

country other than the one in which its
currency is denominated. A Eurobond does
not necessarily have to originate or end up in
Europe although most debt instruments of
this type are issued by non-European entities
to European investors.
Features

 Underwritten by international syndicate of banks.

 Issued by MNEs, large domestic corporations,

government and international institution.

 Offered simultaneously in different capital markets.

Examples of Eurobond

 Wal-Mart issues bonds denominated in U.S.

dollars on the German financial markets.

 The French government issues euro-

denominated bonds on the Japanese
financial markets.
Why attractive ?

 Absence of regulatory interference

 Less stringent disclosure
 Favorable Tax status
 Eurobonds are rated by Moody’s , S&P just
as its done in US markets
Market Composition

 Issuer
 Lead and Co-Manager
 Underwriter
 Sellers
 Trustees
 Paying Agents
Types of Instruments

 Straight Fixed-Rate Issues (66%)

 Structured Notes and Floating-Rate Notes

(32%)

 Equity Related Issues (2%)

Different options

INSTRUMENT INTEREST COUPON TYPE CURRENCY PAYOFF

FREQUENCY
Straight fixed-rate annual Fixed Currency of issue
Floating rate note annual or Variable Currency of issue
quarterly
Convertible bond annual Fixed Currency of issue or
convertible
Straight fixed-rate with annual Fixed Currency of issue plus
equity warrants shares
Zero-coupon bond none Zero Currency of issue
Dual-currency bond annual Fixed Dual Currency
Composite currency annual Fixed Composite currency
bond
Selecting the Currency

Coca-Cola wishes to
raise $1 b. The
company can issue
dollars or pounds
denominated bonds.
Dollars (billions) Pounds (billions)
Initial amount raised 1 1/S($)
n n
Principal payment [1+r($)] [1+r(pounds)] /S
Coca-Cola will float the pound bond only if:
[1+r($)]n > E[S] [1+r(pounds)]n /S

Writing E[S] = S(1+d) n, where d is the expected annual rate of

change in the exchange rate, Coca-Cola will float the pound
bond only if:

r($) > r (pounds) + d

The Gray Market

It is a forward market for overpriced

Eurobonds

Once the issue has been announced the seller

might decide to re-sell the bonds immediately
for forward delivery at 98-99% of par. This is an
attempt to disguise the fact that the issue is
overpriced.
Exemplification

Issuer Weyerhauser (1983) Osaka Gas (1993)

Amount $60 m $250 m
Maturity 7 years 5 years
Coupon 11.5% 5.75%
Issue price $100 $101.489
Listing LuxSE London
Total commission 1.875% 1.875%
Lead Manager Morgan Stanley Goldman Sachs
Gray market price -1.5 to -1.25% + 0.25%
Onshore-Offshore Arbitrage: EXXON Capital Corporation, a
subsidiary of EXXON Corporation

Date Oct. 19,1984 October 1984

Type of security Issues $1.8 b Euro-discount bonds Buys $1.8 b of US T- bonds
Maturity November 15, 2004 November 15, 2004
yield 11.65% 11.825%
Net proceeds +$ 198.6 m -$181 m

Up-front arbitrage profit: $17.6 m

Pfandbriefe Market

 German mortgage-bond market

– largest asset in European bond market and 6th
largest in world
– bonds issued by mortgage banks in Germany
 highlyregulated
 bonds backed by mortgage pools so covered – no single
case of insolvency in this market
– public Pfandbriefe – loans to public sector entities
– mortgage Pfandbriefe – residential and
commercial mortgages
Brady Bonds for emerging market

 Bonds that represent a restructuring of

nonperforming bank loans of governments
into marketable securities.
 Brady bonds are made more attractive than
the original debt as they carry an array of
guarantees These bonds are then offered
through international commercial banks.
THANK YOU