Question

What are the benefits and the drawbacks of investing in the Eurobond market when compared to other international markets.

Answer 1

Euro bonds are debt instruments which are not denominated in the currency of the country in which they are issued. E.g. a Yen note floated in Germany. Some of the companies do prefer to issue such type of bonds for the following reasons/advantages -

1) Allows the foreign players to raise funds in local currency of the market in which they want to enter, in their home country. For Instance, if lets say Pepsi wants to enter Indian markets and invest in establishment of bottling plants but it has to spend in local currency.The cost of borrowing in India may be high being a new entrant in India and may not have the requisite credit line.Therefore Pepsi can issue Eurobond in US and raise funds from US investors with Indian currency.

2) The issuer company has the freedom to issue bonds in the country of their choice and raise funds in the denominated currency.

3) Interest rates are different across countries. The issuer can take advantage of the lower interest rates and issue bonds in local currency.

4)The issuer of Eurobond can mitigate forex risk. In the above example, Pepsi could have raised funds in Dollor, convert that into Indian Currency but then it will have to repay in Dollar at the end of the tenure which may lead to unfavourable forex risk if Indian currency strengthens against ddollar

5) Eurobonds have huge investor base globally hence provides good liquidity

Advantages to the Investor Of Eurobonds-

1)Allows diversification of portfolio where in the resident Investor can invest in foreign investments

2)Get the bonds at lower face value. For instance, an Indian rupee eurodollar bond issued in the U.S with Face value of Rs.10,000 will appear cheaper to U.S. investors as US dollar is stronger currency compared to INR.

3) Eurobonds provide more competitive rates and liquidity

However, some of the disadvantages are:

1) Such bonds are not regulated by domestic regulators and hence can increase the risks

2)Withholding taxes can eat up the earnings from such bonds which has to be calculated by the investor themselves.

3) There can be forex risk in volatile conditions specially from emerging markets