Unlike its name suggests, Eurobonds are not necessarily bonds denominated in the EUR currency.
A Eurobond is a bond that is issued in a currency unequal to the home currency of the issuer. Eurobonds have an international nature and are bought and sold by global capital market participants.
For example, if Nigeria issues bonds denominated in USD, GBP or EUR they are all called “Eurobonds”. To this date, Nigerian issuers have only introduced Eurobonds denominated in USD, however countries such as Benin, Côte d'Ivoire and Senegal have successfully issued Eurobonds denominated in EUR.
It can simply be said that bonds sit between stocks and fixed-term deposits.
Like dividend paying stocks, bonds provide the investor with a regular payment in the form of a coupon. However, unlike stocks, but like fixed-term deposits, most bonds (perpetual bonds excluded) have a fixed maturity date or call date when the investor receives back the principal amount initially invested together with the last coupon.
Bonds are exactly like loans, with the main difference that bonds are more standardised, funds are borrowed from a much larger pool of investors and bonds are more widely and frequently traded.
Bonds are standardised than loans because they have more fixed features such as a more public issuance process (for more information: Issuance Process Section), a clearer and more limited number of contract formats and a more active secondary market.
Loans are granted by a single lender or a group/syndicate of lenders, whereas bonds are the result of a single issuer borrowing funds directly from numerous (global) capital market participants. In other words, the bank will not use its own balance sheet, unless it is actively underwriting the bond during the issuance process.
Finally, once a bond is issued, the bond becomes available in the secondary market. Active buy and sell prices are provided in the secondary market and bondholders can sell their bond holdings in this market. Although a secondary market exists for loans, it is believed to be less transparent and less active (“illiquid”).
Eurobonds come with a substantial amount of descriptive details, such as the tenor of the bond, the coupon rate, the coupon payment frequency or the total amount issued. In this respect, Eurobonds are similar to loan documents or mortgage papers.
In order to capture the most important details of a Eurobond, an overview summary, or term sheet, is usually presented. Please see an example below.
|Minimum Trading Size||$200,000|
|Minimum Trading Increment||$1,000|
|Coupon Payment Frequency||Semi-Annually|
|Day Count Convention||30/360|
A ticker is the shorter version of the description name of a Eurobond. A ticker usually includes an abbreviation of the issuer name, the coupon rate and maturity date.
Some examples are presented below for a Eurobond issued by the Republic of Nigeria that has a 7.625% coupon rate and a maturity date on November 21st 2025.
|NIGERIA 7.625% 2025|
|REPUBLIC OF NIGERIA 7.625% NOV 2025|
ISIN stands for International Securities Identification Number and functions as the barcode for a bond.
An ISIN code is unique to every bond and usually consists of 12 alphanumeric digits. The code starts with two letters followed by ten numerical digits.
The one of-a-kind nature of an ISIN code makes bonds easy to identify, trade and settle.
Most investors believe ISIN codes provide a level of comfort and have become used to them. In some cases, investors are only able to use bonds with an ISIN code as collateral for certain transactions.
A practical disadvantage of a bond with an ISIN code could be when a bond issuer wishes to top up the amount of a Eurobond from an earlier bond issuance. Instead of simply adding an amount to a bond that was already issued, a new bond issuance is needed and therefore additional ISIN code will be needed.
However, increasingly so-called "taps", the topping up issue amount at a later stage, will have ISIN codes merge into the original one after a certain time has passed.
There are various security types or series of Eurobonds, however the main two types for African Eurobonds are the so-called Regulation S (“REGS”) and 144A.
The main difference between REGS and 144A bonds is that the 144A series is predominantly and exclusively for US investors, whereas the REGS series is generally referred to as the “international” version of the bond.
A simple memory aid is that the first two digits of an ISIN code for bonds in the REGS series are “XS”, whereas “US” is used for bonds in the 144A series.
A day count convention tells the investor how many days we assume there are in a month and year for each Eurobond issued.
The below day count conventions are used most frequently.
|Day Count Convention||Calendar Assumption|
|Actual/Actual||We assume the actual days for every month and every year|
|Actual/365||We assume the actual days for every month and 365 days for every year|
|Actual/360||We assume the actual days for every month and 360 days for every year|
|30/360||We assume 30 days for every month and 360 days for every year|
At issuance, the issuer together with the investment banks it teamed up with, decides which day count convention is adopted.
Knowing exactly how many days there are in a month and year is essential for accrued interest calculations. In other words, it ensures there will be no dispute on how accrued interest is calculated as both the buyer and seller use the same day count convention.