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The Global Bond Market The global bond market grew rapidly during the 1980s and 1990s (see Figure 11.5). Bonds are an important means of financing for many companies. The most common kind of bond is a fixed-rate bond. The investor who purchases a fixed-rate bond receives a fixed set of cash payoffs. Each year until the bond matures, the investor gets an interest payment and then at maturity he gets back the face value of the bond. International bonds are of two types: foreign bonds and eurobonds. Foreign bonds are sold outside of the borrower's country and are denominated in the currency of the country in which they are issued. Thus, when Dow Chemical issues bonds in Japanese yen and sells them in Japan, it is issuing foreign bonds. Many foreign bonds have nicknames; foreign bonds sold in the United States are called Yankee bonds, foreign bonds sold in Japan are Samurai bonds, and foreign bonds sold in Great Britain are bulldogs. Eurobonds are normally underwritten by an international syndicate of banks and placed in countries other than the one in whose currency the bond is denominated. For example, a bond may be issued by a German corporation, denominated in US dollars, and sold to investors outside of the United States by an international syndicate of banks. Eurobonds are routinely issued by multinational corporations, large domestic corporations, sovereign governments, and international institutions. They are usually offered simultaneously in several national capital markets, but not in the capital market of the country, nor to residents of the country, in whose currency they are denominated. Eurobonds account for the lion's share of international bond issues. Attractions of the Eurobond Market Three features of the eurobond market make it an appealing alternative to most major domestic bond markets; specifically,
Regulatory Interference National governments often impose tight controls on domestic and foreign issuers of bonds denominated in the local currency and sold within their national boundaries. These controls tend to raise the cost of issuing bonds. However, government limitations are generally less stringent for securities denominated in foreign currencies and sold to holders of those foreign currencies. Eurobonds fall outside of the regulatory domain of any single nation. As such, they can often be issued at a lower cost to the issuer. Disclosure Requirements Eurobond market disclosure requirements tend to be less stringent than those of several national governments. For example, if a firm wishes to issue dollar-denominated bonds within the United States, it must first comply with SEC disclosure requirements. The firm must disclose detailed information about its activities, the salaries and other compensation of its senior executives, stock trades by its senior executives, and the like. In addition, the issuing firm must submit financial accounts that conform to US accounting standards. For non-US firms, redoing their accounts to make them consistent with US standards can be very time consuming and expensive. Therefore, many firms have found it cheaper to issue eurobonds, including those denominated in dollars, than to issue dollar-denominated bonds within the United States. Favorable Tax Status Before 1984, US corporations issuing eurobonds were required to withhold for US income tax up to 30 percent of each interest payment to foreigners. This did not encourage foreigners to hold bonds issued by US corporations. Similar tax laws were operational in many countries at that time, and they limited market demand for eurobonds. US laws were revised in 1984 to exempt from any withholding tax foreign holders of bonds issued by US corporations. As a result, US corporations found it feasible for the first time to sell eurobonds directly to foreigners. Repeal of the US laws caused other governments--including those of France, Germany, and Japan--to liberalize their tax laws likewise to avoid outflows of capital from their markets. The consequence was an upsurge in demand for eurobonds from investors who wanted to take advantage of their tax benefits. |
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