Bonds #11: Eurobonds

Sounds pretty sexy, huh?

I keep telling you – little of this is rocket science. But international investing has its own pitfalls, even when left to a professional fund manager. But you should know enough to be able to ask your financial advisor the right questions.

The textbook definition is daunting:

Eurobonds are bonds denominated in various currencies, including U.S. dollars, and intended for sale outside the country of origin.

Since foreign exchange is not a topic for this column (or this writer!) let us limit the topic of Eurobonds to Eurodollar bonds, also known as “US pay”.

What is a Eurodollar NOT?

It is not a different currency, and shouldn’t be confused with the Euro – the currency of 11 countries in Europe since 1999.

So what IS a Eurodollar?

Here’s an example given to me over 30 years ago, when I started out in international banking:

“If you have a dollar in your pocket, get on a plane, land outside the U.S. and take the bill out of your pocket, you will be looking at a Eurodollar.”

If a US corporation has an overseas branch and wants to raise money to pay liabilities it has in dollars, it can issue a U.S. dollar bond overseas. If you have your broker buy that bond to hold in your account, you have invested in a Eurodollar bond.

So, you ask me, what is different between a

US $ GE Credit 7% bond due in five years and a

US $ GE Credit (Overseas) 7% Eurobond due in 5 years?

There are some differences:

The corporate bond was issued in the US; the Eurodollar bond was issued overseas.

The domestically issued bond is registered with the SEC; the Eurobond is regulated under an agency of the issuing country.

The domestic corporate bond pays its coupon interest in two semi-annual pieces; the Eurobond usually pays annually.

The domestic security has greater liquidity (ease of sale).

The offshore issue usually has a higher yield.

Many types of entities can issue Eurodollar bonds:

U.S. corporations

Offshore branches of U.S. banks

Foreign banks and corporations

Supranational organizations such as the World Bank

Sovereign countries such as France or the United Kingdom

Eurodollar bonds are given ratings:

(AAA, AA, A, BBB, etc.)

by Standard & Poor’s and Moody’s Investor Service, just as U.S. issues are rated. Political and social stability, a greater risk than in the U.S., is part of this credit rating.

By sticking with Eurodollars, there is no currency risk. There remain differences in accounting procedures that can cloud comparisons between risk in companies.

All in all, there are pitfalls in Eurobonds that can best be managed by professionals.

But for a U.S. investor, is there no way to take part in international bond investing?

We look next at global bonds and Yankee bonds!