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International Financial Management

Notes International Bonds Market

This constitutes the long-term debt market in the international scene. Many countries have very
active bond markets available to domestic and foreign investors. The US market in the mid
1980s was very attractive for the foreign investors given the relative political and economic
stability, high real rates of interest and the government’s desire to finance its budget deficit with
borrowings. The International Bond Market can be broadly classified into two categories: Foreign
bonds and Euro bonds.
Foreign Bonds: These are the bonds floated in a particular domestic capital market (and in the
domestic currency of that market) by non-resident entities. The bonds are generally named on
the basis of the capital markets in which they are floated.

Example: An example of an Indian company going in for a foreign bond (namely Yankee
bond) is that of Reliance. The $200 million Yankee bond issue of RIL was split into two issues of
$100 million each. One issue had 20 years maturity period while the other had a 30 years
maturity with a put option after 12 years. These were priced just at the end of the indicated band
of 350–370 basis points and generated enough demand to raise $200 million. This offering was
assigned Baa3 rating by Moody’s and a BB+ by Standard and Poor. Further, RIL succeeded in
even selling 50 year bonds with a put option in the 13th year at 350 basis points over treasuries.
Dollar denominated bonds issued in the US domestic markets by non-US companies are known
as Yankee Bonds. Yen denominated bonds issued in Japanese domestic market by non-Japanese
companies are known as Samurai Bonds. Pound denominated bonds issued in the UK are called
Bulldog Bonds.

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Caution The procedure for floating foreign bonds is similar to that of Euro bonds.
However, the complexities of individual market mechanisms and their respective
characteristics need to be understood.

Euro Bond Market

Euro bonds are unsecured debt securities issued and sold in markets outside the home country
of the issuer (borrower) and denominated in a currency different from that of the home country
of the issuer. Euro bonds are underwritten and sold in more than one market simultaneously
usually through international syndicates and are purchased by an international investing public
that extends far beyond the confines of the countries of issue. For example, a dollar denominated
bond issued in the UK is a Euro (dollar) bond; similarly, a Yen denominated bond issued in the
US is a Euro (Yen) bond.
Occasionally, Euro bond issues may provide currency options, which enable the creditor to
demand repayment in one of several currencies and thereby reduce the exchange risk inherent
in single currency foreign bonds. More recently, however, interest and principal on the bonds
are payable in US dollars. Over the last several years, the Euro bond market has become a
market for dollar denominated obligations of foreign as well as US borrowers that are purchased
by non-US investors.
In an effort to broaden investor appeal, corporate borrowers have increasingly shifted from
straight debt issues to bonds that are convertible into common stock. The option of conversion
rests with the holder of the convertible issue. For the non-resident investor, one of the main
attractions of a convertible issue is that it usually offers a large current return than the dividend
of the underlying stock.

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