In 1992, Mauritius became
the first offshore financial Mauritius
center in the southern
hemisphere. There are
now over 1500
Management: INBU 4200
Fall Semester 2004
The International Bond Markets
International Capital Markets
• International Capital Markets Consist of:
• International Money Markets
– Corporate short term borrowing and depositing through:
• Global commercial banks (both offshore and domestic markets)
• International Debt (Bond) Markets
– Corporate and Government long term borrowing and institutional
and individual investing through:
• Euro bond markets (offshore)
• Foreign bond markets (domestic markets)
• Equity Markets (Stock Markets)
– Corporate fund raising (IPOs) and institutional and individual
• National stock markets
Importance of These Markets
– Provides them with a wide range of borrowing
possibilities (global in nature).
• Offshore and foreign domestic markets
– Provides them with potential swap arrangements
• Borrowing in one market and swapping out to another.
• Interest rate/currency swaps.
– Provides them with a wide range of investing
possibilities in terms of:
• Types of assets,
International Bond Markets
• Three basic segments for corporates, governments and investors:
• Foreign Bonds (external borrowers in domestic financial markets)
– Issued by a non-resident and denominated in the currency of the
country in which it is being offered.
• GE issuing a yen denominated bond in Japan
• Republic of China issuing a dollar denominated bond in the U.S.
• Foreign Bonds (internal, domestic borrowers)
– Issued by a resident and denominated in the currency of the
country in which it is being offered.
• U.K. Government issuing a pound sterling bond in the U.K.
• This market is potentially important to global investors seeking foreign
• Eurobond (offshore)
– Issued by a non-resident and denominated in a currency other than
the currency of the country in which it is being sold.
• GE issuing a dollar denominated bond in Europe.
Characteristics of Foreign Bonds
for U.S. Investors
• From a U.S. investor standpoint, a foreign bond
has three distinct characteristics:
– The bond is normally issued by a foreign entity
• Such as a foreign government, foreign municipality or foreign
• Exception: U.S. entity (corporation) could be the borrower in
a foreign market.
– The bond is traded on a foreign financial market.
• Domestic market of the foreign borrower.
– The bond is denominated in a foreign currency.
• Not the U.S. dollar!
• Domestic currency of the foreign borrower, or where the U.S.
entity is borrowing.
Risk with Foreign Bonds
• Foreign bonds carry two major risk elements:
– Risk of default
• A primary risk of a foreign bond is that it is an unenforceable claim.
An investor that owns the bonds of a borrower in his or her home
country has specific legal recourse in the event of default. Foreign
bonds, however, offer no such protection.
• An extremist political movement (e.g., Iran in the 1970’s) could
come to power and seize or deny all foreign assets and claims.
• A country may become engaged in a military conflict and prohibit its
currency from leaving its borders. After World War II, for example,
U.S. investors holding bonds in Great Britain were paid interest in
pounds yet were unable to convert those pounds to dollars; the
money could only be reinvested in pound-denominated investments
or spent within the borders of Britain or her colonies.
– Foreign exchange risk
• the potential for loss due to fluctuations in exchange rates.
• Currency risk can literally turn a profit on a foreign investment into a
loss or visa versa.
Foreign Government Bonds
• Foreign Government Bonds: Bonds which are a direct
obligation of a foreign government.
• These bonds are of two classes:
– (1) external bonds, those marketed and intended for investment
by investors in another country and payable as to both principal
and interest in the currency of that country, and
– (2) internal bonds, those marketed in the home country of the
government in question and payable in the currency of that
• A few foreign government issues are payable in several
currencies and are known as multiple currency issues.
The external bonds of foreign countries which have been
marketed in the United States are also known as Yankee
Record of Foreign Government
• The performance record of foreign government
bonds sold in the United States over the last 100
years is uneven at best.
– During the Great Depression of 1929–1933, many
South American governments defaulted on their
– World War II resulted in default on various European
– The late 70’s and 80’s were characterized by many
government debt defaults (throughout the emerging
• Third World Debt Crisis in response to global slowdown and
rising price of oil
Governments in the Foreign Bond
• Why do Governments borrow in foreign bond
– Foreign market may be larger and thus offer
opportunities for larger borrowings and at better
borrowing terms (interest rates).
• Many countries bypass their smaller domestic markets to
issue in larger foreign markets, especially the U.S. market.
– Interest rates in domestic markets may be relatively
high due to internal economic factors:
• Inflation, business cycle, central bank policies.
– Foreign markets may be more transparent then
domestic markets, and thus offer better protection for
• More transparency means potentially less risk and thus a
lower required return (i.e., lower borrowing costs).
• Especially true with the world’s major capital markets such as
the United States.
Government Bond Markets:
10-year Bond Yields and Spreads
October 21, 2004
Corporates in the Foreign Bond
• Corporates are also attracted to the foreign bond
– Domestic markets may be fairly developed but small
and thus result in higher borrowing costs.
• Many markets in Europe prior to the single market.
• Smaller markets in emerging Asian nations today.
– Domestic markets may be underdeveloped and small
and result in less favorable borrowing terms.
• China today.
• These countries are attempting to “enhance” their domestic
– Vietnam (Postal savings scheme similar to Japanese model).
– Domestic markets may be less transparent resulting
in less investor protection.
• Requiring higher required returns (i.e., borrowing costs).
Postal Savings Systems
• Japan: Essentially a government run banking system
based on the post office.
– Japan has 24,000 post offices, and each has a bank inside.
– System was created in 1875 and modeled after a British system
established in 1861.
• The United States created one in 1910, attracting mostly urban
immigrants who distrusted private banks. It never gained the
popular appeal that the Japanese version has and was dismantled
– It is the largest financial institution in the world, with about $2.4
trillion (250 trillion yen) on deposit.
– Many government corporations have financed projects with
loans from the postal savings system.
– Now going through a process of privatization!
Examples of International Bonds:
Issued October 21, 2004 by Currency,
Amount, Yield, and “Book-Runners”
• In U.S. Dollars
– Republic of China, $500M, 3.8%, Merrill/JPMorgan
• In Euros
– BNG (Benetton Group, Italian company) 1.5B 3.3%,
Citi/JPMorgan (through London)
• In British Pounds
– KBC Bank (Belgium Bank) 175m 5.8%,
• In Canadian Dollars
– Toyota Credit of Canada100m 4.2%,TD Securities
• U.S. Federal securities laws are designed to provide
disclosure of financial information about borrowers:
– seeking an initial public stock offering (IPO) or issuing bonds,
– those already publicly held.
• The Securities Act of 1933 requires that a borrower,
before offering securities to the public, must file a report
detailing several categories of information specified by
the Securities and Exchange Commission (SEC).
• The Securities Exchange Act of 1934 deals mainly with
securities already publicly held. Issuers of such
securities must publish periodic reports outlining current
Registering Bonds in the U.S.
• All bonds being offered to the investing public in
the United States must be registered with the
Securities & Exchange Commission.
– U.S. government, federal agency and municipal
bonds are exempt from the registration rule.
• Registration requires that specific information be
disclosed, such as:
– include financial data about the borrower,
– how the money will be spent,
– how the borrower intends to repay.
– the terms of the bond itself.
• Included in the bond’s indenture.
Regulation S Bonds
• As noted, qualified bonds issued in the United States
must be registered with the Securities and Exchange
• However, Regulation S permits a US dollar bond offered
outside America without registration under the US
Securities Act of 1933. These bonds cannot be sold to
– Telekom (Malaysian telecommunications; Moody’s A3), $500M,
5.3% yield, offered September 15, 2004. Book runners:
Deutsche Bank and UBS.
– Sold to 183 investors representing a mix of pension funds, asset
managers, banking/financial institutions, and private banks; all
sales outside of the United States: 61% in Asia and 39% in
Global Bond Data
• Year end 2002, the face value of bonds outstanding in the world was
estimated at $37.3 trillion.
– Domestic bonds represented the largest share of this amount, or about
82% ($30.5 trillion).
• This measures borrowing by residents in their own markets.
• The U.S. market dominates, with about 59% of this total.
– International bonds (foreign and euro bonds) only represent about 18%
• By currency of denomination (total bond market):
– 50% denominated in U.S. dollars,
– 20% in euros, and
– 17% in yen.
• By currency of denomination (International bond market)
– 51% in U.S. dollars
– 32% in euros
– 7% in pounds, and
– 6% in yen
Amounts of Domestic and International Bonds
As of Year-End 2002 in U.S. $Billions
Currency Domestic Percent International Percent Total Percent
U.S. dollar $15,377.0 50.4% $3,465.6 50.7% $18,842.6 50.5%
Euro $5,226.1 17.1% $2,170.2 31.7% $7,396.3 19.8%
Pound $920.8 3.0% $505.3 7.4% $1,426.1 3.8%
Yen $5,846.8 19.2% $409.1 6.0% $6,255.9 16.8%
Other $3,118.2 10.2% $288.9 4.2% $3,407.1 9.1%
Total $30,488.9 100.0% $6,839.1 100.0% $37,328.0 100.0%
International Bonds: Eurobonds
• In any given year, about 80% of the world’s
international bonds are likely to be euro bonds
(as opposed to foreign bonds).
– Offshore issues.
– They are noted by the name of the currency in which
they are denominated:
• Eurodollar bonds,
• euroyen bonds,
• euroeuro bonds
– They may or may not be available to home currency
International Bonds: Foreign Bonds
• Foreign bonds represent about 20% of the new
international bond offerings in any year.
– They are noted by the country where they are issued
and have taken on rather “unique” names:
• Yankee bonds (issued in the U.S.)
• Samurai bonds (issued in Japan)
• Bulldogs (issued in the United Kingdom)
• Matadors (issued in Spain)
• Kiwi bonds (issued in New Zealand)
• They are usually issued because of attractive
interest rates and then swapped out the issuing
currency into a “home currency.”
– Especially true with regard to Samurai bonds today.
Who Issues International Bonds?
Nationality U.S. $ Billions
• Distribution (2002) of
Australia 99.8 International Bond
Canada 208.3 Offerings by
France 366.7 Nationality
Germany 889.4 • U.S. borrowers
Italy 259.3 represent about 32%
Japan 245.6 of total.
Sweden 293.9 • Germany, 13%
U.K. 571.5 • U.K., 8%
United States 2,170.3
What Type of Borrower is Involved
in the International Bond Markets?
Type of Issuer U.S. $ • Financial institutions
are the major
Institutions borrowers with 59%
Governments 1,416.5 • Governments at 21%
• Corporates at 15%
Bearer Versus Registered Bonds
• Bearer Bonds:
– Possession is evidence of ownership.
• Issuers does not keep ownership records.
• Offer privacy and anonymity to holders.
– Thus, carry a lower interest rate than registered bonds.
• Eurobonds are bearer bonds.
• Registered bonds:
– Owners name is recorded by issuer.
• Yankee bonds and U.S. corporate bonds must be
Regulations of International Bonds
• Foreign bonds must meet the registration and listing
regulations of the country in which they are issued.
– Yankee bonds must comply with 1933 Securities Act requiring
full financial disclosure and the offering of a prospectus to
potential public buyers.
• Eurobonds are not required to meet registration
– For example, not required of euro-dollar bond offerings outside
of the United States (Reg S).
• Issue of time and expense in bring a foreign bond to
market has resulted in a general preference for
eurobond offerings by global borrowers.
– Response of U.S. to timing and disclosure issue:
• U.S. shelf registration, or pre-registration, (rule 145) since 1982 has
reduced the time issue.
• Private placements (rule 144A) since 1990 do not have to meet the
full disclosure requirements of the 1933 Act.
International Bonds: “Global Bond”
• Refers to a large international bond simultaneously
offered in different financial markets (first appeared in
– May be issued in different currencies
• Deutsche Telekom $14.6 billion (2000 offering) multicurrency
(dollar, euro, pound, yen) issue
– Or same currency:
• AT&T $8 billion (1999) U.S. dollar global offering (throughout the
• Usually sold throughout North America, Europe, and
• Usually sold to institutional investors.
– Pension funds, insurance companies, private banks, asset
Types of International Bonds
• Straight Fixed Rate Bond
– Most international bonds are of this type
– Designed maturity date,
– Fixed coupon payments (% of par value),
– Eurobond interest is typically paid annually:
• Less costly for borrowers
– No options (e.g., convertibility) attached
– Entire issue brought to market at one time.
– U.S. dollar bonds the most popular
– Sometimes referred to as “plain vanilla” bonds!
International Bonds: Types
• Euro-Medium Term Notes (Euro MTNs)
– Similar to straight fixed rate bonds in that they
have a fixed maturity and carry a fixed coupon
– Unlike a straight fixed rate bond, they are sold
on a “continuous basis” through some
prearranged period (called an issuance
• Allows issuers to raise money as needed
– Generally carry maturities from less than 1
year out to 10 years.
International Bonds: Types
• Floating Rate Notes (FRNs)
– Coupon rate is indexed to some reference
• Usually LIBOR!
– Coupon reset at time of interest payment for
the next period.
• Coupon payments generally reset every 3 or 6
– U.S. dollar and euro denomination dominate
International Bonds: Types
• Equity Related Bonds
– Convertible issues
• Fixed income bond which,
• Allows the holder to exchange the bond for a predetermined
number of share of common stock.
• Carry lower interest rates than a straight only bond.
– Bonds with Equity Warrants
• Fixed income bond with,
• Call option (or warrant) feature which allows the holder to
purchase a certain number of equity shares at a pre-stated
price over a predetermined period of time.
International Bond Types
• Zero Coupon Bonds
– Sold at a discount from face (par) value,
– Do not pay any coupon interest
– At maturity, holder receives full face (par) value.
– Return is represented by the difference between price
and face value.
– Most popular currencies have been the U.S. dollar
and Swiss franc.
– Especially attractive to Japanese investors
• Their tax laws treat the return as a tax free capital gain
(where coupon payments are taxable)!
International Bonds: Types
• Dual-Currency Bonds
– Fixed rate bond that pays interest in one currency,
– Upon maturity, pays principal value in another
• Very popular among Japanese firms:
• Coupon payments in yen; principal repayment in dollars.
– Used by Japanese companies wanting to establish or expand
U.S. based subsidiaries.
– Japanese subsidiaries anticipate generating U.S. dollars
needed to pay off the principal from their activities in the United
Review: Characteristics of International
Bond Market Instruments
Instrument Frequency of Size of Payoff at
Payment Coupon Maturity
Straight Fixed-Rate Annual Fixed Currency of issue
Floating Rate Note Every 3 or 6 months Variable Currency of issue
Convertible Bond Annual Fixed Currency of issue
or conversion to
Straight fixed rate Annual Fixed Currency of issue
with equity warrants plus conversion to
Zero None Zero Currency of issue
Dual Currency Annual Fixed Dual currency
• Lead Manager(s) (“Book-runner”)
– Primary investment banking firm(s)
• Lead manager of underwriting syndicate.
• Negotiate terms with the issuer, ascertain market conditions and
• Put together the underwriting syndicate!
• Underwriting Syndicate
– Group of investment banks, merchant banks, and commercial
banks that will bring the issue to market.
– Syndicate members commit their own capital to buy the issue
from the issuer (at a discount) and then resell this issue.
• Underwriting spread is typically 2 to 2.5%!
• Selling Group:
– Includes the underwriting syndicate plus other institutions.
– Sell the bonds to the public and receive commission for doing so.