Eurobonds - what is it? Who issues and why do they need eurobonds?

In the market of long-term securities there is a special type of debt, called Eurobonds. Borrowers for them are governments, large corporations, international organizations and some other institutions interested in attracting financial resources for a fairly long time and with the least cost. For the first time these tools appeared in Europe and were called eurobond, which is why they are often called "Eurobonds" today. What are these bonds, how do they issue and what advantages do they give to each participant in this market? We will try to explain the answers to these questions in detail in the article.

The concept and main characteristics of Eurobonds

In simple words, we can say that these are bonds issued in a currency different from the national currencies of the lender and the borrower, and placed simultaneously in the markets of several countries (with the exception of the issuing country). They are intended, as a rule, to raise funds for a long period of time - up to 40 years. There are also short-term Eurobonds, issued for a year-three-five, and medium-term - for a period of ten years.

Eurobond market participants

There are special institutions that place Eurobonds. What are these structures? This is an international syndicate of underwriters, which includes financial institutions of different countries. At the same time, their issue and turnover are regulated by national legislation in a limited manner. Also there are issuers (governments, international and national structures) and investors (financial structures - insurance companies, pension funds, etc.). All participants are members of the International Association of Capital Market Participants (ICMA), a self-regulating organization based in Zurich. Clearstream and Euroclear are used as depository and clearing systems.

There is a special Directive of the Commission of the European Communities, which gives a full official definition of this instrument, regulates the rules and procedure for proposing emissions in the market. According to it, eurobonds are tradable securities with a number of signs:

• The need for them to underwrite the procedure and place them through a syndicate, at least two of which belong to different states;
• Their offer is carried out in large volumes in the markets of several countries (but not in the issuer's country);
• Initially acquired through a lending institution or other approved financial institution.

Properties of Eurobonds

Eurobonds - what kind of papers and what characteristics do they have? First, each eurobond has a coupon, which gives the investor the right to receive interest on bonds at a certain time. Secondly, the interest rate can be either fixed or floating (depending on various factors). Third, the payment of interest can be done in a currency different from that in which the loan was borrowed. This is called a double denomination. In addition, it is important to know a number of other features of such securities, namely:

• These are bearer securities;
• Are placed simultaneously in several markets;
• Are issued for a long term - usually 10-30 years (up to 40 inclusive);
• The currency in which the loan is attracted is foreign to both the issuer and the investor;
• The nominal value of a Eurobond is a dollar equivalent;
• Payment of interest on coupons is carried out without withholding tax;
• Eurobonds are placed by the issuing syndicate, which includes banks, brokerage and investment companies of several countries.

Eurobonds are one of the most reliable financial instruments, and therefore their customers are usually such financial institutions as investment companies, pension funds, insurance organizations.

History of the emergence and development of the Eurobond market

The issue of Eurobonds under the classical scheme of placement was first carried out in Italy in 1963. The issuer was the state road construction company Autostrade. Sixty thousand bonds with a par value of $ 250 each were placed. Precisely because initially eurobonds appeared in Europe, and to this day the bulk of their trade is carried out there, the name of the paper has a prefix "euro". Today, this is more a tribute to tradition than a real characteristic of the instrument.

The active development of this market occurred in the 80's. At that time Eurobonds to bearer were very popular. Later, in the 90s, they were "harassed" by euronotes - medium-term registered bonds issued by developed countries and having (as against eurobonds) collateral. This was due to the growth of market capitalization and strengthening of the status of major borrowers. Then their share in the total eurobond issue reached 60%.

At the end of the 20th century, large bonded loans called "jumbo" appeared on the market. The liquidity of Eurobonds has increased, and the interest of the largest borrowers in the face of American government agencies and national entities has increased. In addition, due to the global crisis and the default on government loans in a number of South American countries, the role of bonded loans in comparison with bank loans has increased. There was a so-called process of "flight to quality", when investors prefer safe investments, rather than high-yield investments with a sufficiently serious risk.

Eurobonds today

To date, Eurobonds enjoy no less demand. The main goal of issuers to this market is to search for alternative sources of financial resources (along with traditional domestic, in particular, bank loans), as well as diversification of loans. In addition, there are a number of advantages that Eurobonds possess. What is this "profit"? First, saving costs in connection with attracting capital (can reach 20%). Secondly, there are fewer kinds of legal formalities and obligations accepted by the issuer. Thirdly, there are practically no restrictions on the directions and forms of using funds, the flexibility of the market, etc.

Issue and circulation of Eurobonds

There are various options for placing Eurobonds, the most common is an open subscription. It is carried out through a syndicate of underwriters, and issues are listed on the exchange. After the initial sale, they are "thrown out" by dealers to the secondary market, where they can be purchased over the phone and online from investment companies. Like any investment tool, Eurobonds have quotes and yields on them, which depend on the supply and demand in the market. However, there is another version of the issue - limited placement among a certain range of investors. In this case, the bonds are not traded on the exchange (do not have listing).

Eurobonds of Russia: current situation

For the first time our country entered the international market of Eurobonds in 1996. The first issues of this type of debt were carried out during the period 96-97. Then the right to place them under a number of conditions was obtained by two subjects of the federation - Moscow and St. Petersburg. Today, participants in this market are the largest corporations of the country: Gazprom, Lukoil, Norilsk Nickel, Transneft, Post of Russia, MTS, Megafon. Significant role is also played by Eurobonds of Sberbank, VTB and Gazprombank, Alfa-Bank, Rosbank and others. It is important to note that for Russian companies entering the eurobond market is limited by national legislation. So, joint-stock companies can attract financing with the help of this instrument in the amount not exceeding the amount of their authorized capital. There are also restrictions on issuing unsecured eurobonds (usually a pledge is required) and other rules. You can find out the reliability of Russian issuers according to the data of specialized rating agencies such as Moody's, Standard & Poor's and others.

Russia is annually present on the international borrowing market. Despite the fact that there are enough sources of financing in the country, according to the Minister of Finance, this is an important event within the framework of the Russian budget policy. In 2014, one or two outlets to the foreign market with Eurobonds in dollars and euros are planned, with a total volume of 7 billion dollars (presumably).

Ukrainian Eurobonds: buy and "burn"

Russia participates in this system not only as an issuer, but also as an investor. Last December, Russia bought Eurobonds of Ukraine with a total of $ 3 billion, becoming the only buyer of this issue. However, such an investment can not turn out for the country in the best way. Since February of this year, S & P and Fitch have repeatedly lowered the rating on Ukrainian Eurobonds. What does this mean? The rating of bonds reached the level of CCC (pre-default), their value in the market decreased, and the probability of default on them increased. Russia at the same time may require early repayment of the debt, but its position in this matter is weak. In connection with the negative trends in the economy of Ukraine, the Russian Federation will not easily prove that it did not suspect about the possibility of a default, the risks of which were spelled out in the 200-page prospectus. The refusal of Ukraine to meet its obligations has very unpleasant consequences for the country itself, due to the deterioration of credit history on the international market, the seizure of property of holders of its securities abroad and the inability to enter the debt market of Eurobonds for a long time. Therefore, in the interests of both parties, a positive solution to the issue of bonded debt.

Conclusion

Thus, Eurobonds are very reliable, as a rule, long-term investment instruments that allow to attract financing on the international capital market. They are placed through specially created syndicates and are regulated by supranational structures. Great importance is played in the Eurobond market by rating agencies that determine the reliability of financial instruments of a particular country. Today, Russia is an active participant in the international market of Eurobonds, acting on it as an issuer and investor.