UK: Eurobonds - Are Eurobonds The Answer To An Unstable Securities Market?

Last Updated: 10 November 2011
Article by Rob Askew and Katherine O''Neill

Following the financial crisis in 2008 and the resulting reduction in the availability of traditional bank credit, companies looked to alternative methods of raising finance. In 2008 and 2009, we saw an increase in the number of rights issues and other secondary equity offerings by companies with shares listed on the London Stock Exchange. The rate of equity fundraisings has slowed since the end of 2009 and, with bank lending almost at a standstill, a number of companies instead turned to the debt capital markets and, in particular, to Eurobonds as a more stable investment vehicle.

What is a Eurobond?

Eurobonds are specialist debt securities, usually in bearer form, which are typically marketed to institutional investors on the international capital markets. It is a common mistake to think that 'Eurobonds' are related to the single currency adopted by some EU countries. In reality, they have nothing to do with the 'Euro'. In this context, the term 'Euro' refers to the international aspect of the relevant bonds, which are issued and traded outside the country in whose currency they are denominated, and outside the regulations of a single country.

Such bonds are free of withholding tax and traded electronically, rather than in physical form.

Regulation

Often, the offer of Eurobonds to investors will be governed by English law and the regulations of the jurisdiction in which the investments are ultimately listed. In particular, the regulations require the provision of accurate information to investors. Typically, the issuer will appoint an investment bank as lead manager to arrange the offer of the Eurobonds, as well as various other advisors. A document containing details of the issuer and the basis of the Eurobond offering will be prepared and sent to investors.

As noted, additional regulations apply where Eurobonds are being listed (for example, where bonds are to be listed in London, the requirements of the London Stock Exchange will need to be met and certain of the Listing Rules issued by the Financial Services Authority will also apply).

Benefits of Listing a Eurobond

The key motivations for deciding to list a bond on a stock exchange include:

  • Prestige and investor security
  • Tax advantages
  • Perceived advantage of liquidity in the secondary market.

London and Luxembourg are considered to be the global centres for the origination, execution and listing of Eurobonds. The advantages of listing such bonds in London include:

  • London is the only listing venue which does not charge bond issuers an annual fee
  • The UK Listing Authority (UKLA), a division of the Financial Services Authority, has a specialist Central Debt Desk with primary responsibility for reviewing Eurobond documentation
  • English is the common language for virtually all Eurobond documentation and any delay or misunderstanding arising from listing where English is not the first language will be minimised.

Conditions for Listings

As Eurobonds are only offered to institutional investors, listing requirements are less onerous when compared to issues of debt securities to retail investors. There are a number of key requirements which must be fulfilled for Eurobonds to be listed in London, including:

  • At least a two-year trading record and independently audited accounts
  • Compliance with UKLA's listing rules and with the London Stock Exchange's Admission and Disclosure Standards
  • The Eurobonds must be freely transferable
  • The Eurobonds must have a market capitalisation of at least £200,000.

In general, the regulatory framework for issuers of Eurobonds listed on the London Stock Exchange is less onerous than for issuers with listings of shares. This recognises the fact that Eurobond prices in the secondary market tend to be less sensitive than a company's shares to changes in its commercial performance or business prospects, and more sensitive to wider economic changes.

Some of the regulations applying to the listing of convertible Eurobonds overlap with those applying to listings of shares, such as the requirement for issuers to have independently audited accounts.

Market Trends

While much of the recent press coverage regarding Eurobonds has focussed on issues by sovereign states, as well as discussion of issues by the European Union, investor demand for corporate Eurobonds has been strong. Russian companies in particular have been taking advantage of this demand, as low yields have driven investors to look to emerging market debt offerings. Recent successful issues include:

  • An $850 million offer by Evraz Group S.A., a large steel and mining business listed on the London Stock Exchange, which was more than twice oversubscribed
  • An issue of €400 million by Trafigura, one of the world's leading oil and metals traders, for which bids of €1 billion were received from potential investors
  • An issue of $500 million Eurobonds by Ferrexpo, a Swiss-headquartered iron ore company with assets in Ukraine, also oversubscribed.

Final Word

In the current market, the lower levels of regulation applying to listed Eurobonds can make them an attractive alternative to seeking a listing of shares for an issuer looking to raise finance and unable to find appropriate bank financing, or unwilling to accept the terms on offer.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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