Fixed Income International Bonds

Key Covenants for Eurobonds

- Governing Law: most transactions are governed by UK law - Security: issues are not secured by the company's assets - Negative Pledges: they prohibit an issuer from creating security interests on its assets unless all bondholders receive the same level of security - Subordination: expect for bank or insurance capital issues, most bonds are sold on a senior basis - Cross-Default clauses: if the issuer defaults on other borrowings, then the bonds will become due and payable - Prohibition on the sale of material assets: most documentation prohibits the sale or transfer of material assets of subsidiaries

What are the distinguishing features of bonds sold in the external bond market (international bond market)?

- They are underwritten by an international syndicate -At issuance they are offered simultaneously to investors in a number of countries -They are issued outside the jurisdiction of any single country -They are in unregistered form

3 Characteristics of Global Bonds

1. At issuance, they are sold simultaneously in multiple bond markets throughout the world at the same offering price 2. They are traded in multiple bond markets throughout the world without restrictions with settlement that is similar to a trade of domestic bonds 3. The issuance size is large, allowing for multiple tranches by maturity

Investors in Covered Bonds have 2 claims

1. Claim on the cover pool 2. Claim against the issuing bank.

Selling restrictions on Eurobonds in the US

1. The transaction must be an offshore transaction 2. There can be no directed selling efforts associated with the offering made in the US 3. 40 day waiting period before it can be sold in the US

European Bloc

2 groups: 1. Euro zone market: Germany, Holland, France, Belgium, Luxembourg, Austria, Italy, Spain, Greece, Portugal, Finland (all use the Euro) 2. Non-Euro zone: Norway, Denmark, Sweden

What are the vast majority of international bonds?

70% are fixed rate

Coupon Step-Up or Step-Down Bonds

A change in the coupon is triggered by a change in the issuer's credit rating -A rating upgrade would result in a lower coupon rate and a rating downgrade would result in a higher coupon

Foreign Bond Market

A country where bonds of issuers not domiciled in the country are issued and traded

Supranational Agency

An entity that is formed by 2+ central governments through international treaties -Promotes economic development for the member countries

Yankee Bond

Are bonds issued by non-US entities that are registered with the SEC and traded in the US -Most issuers are sovereign gov, subsovereign entities, supranational agencies, financial institutions, and corporations -Part of US foreign bond market

Euro Medium Term Notes

Are debt obligations that are intended for primarily for offerings outside the US Typically EMTNs are intended for European investors. Their denomination can be any currency

Drop-Lock Bonds

Automatically change the floating coupon rate to a fixed rate under certain conditions -Apply to Eurobonds

Bond Equivalent Yield

BEY of Eurodollar Bond = 2[(1 + YTM of Eurodollar bond)^1/2 - 1] Use this if given the YTM on a Eurodollar Bond

Covered Bonds

Bonds issued by banks. The collateral can be either residential mortgage loans, commercial mortgage loans, or public sector loans -Considered highly secure bonds so they receive high ratings

Dual-Currency Bonds

Bonds that make coupon payments in one currency and pay the par value at maturity in another currency.

Debt Warrant

Entitles the warrant owner to buy additional bonds from the issuer at the same price and yield as the host bonds

What is the difference between Eurodollar coupon and US bond coupon?

Eurodollar pays annual coupon and US pays semi-annual coupon

Foreign Exchange Risk

If the foreign currency depreciates (declines in value) relative to the dollar, the dollar value of the cash flows will be proportionally less -Can be hedged with foreign exchange spots, forwards, futures, swaps, or options instruments

Option Currency Bond

Is one that offers to either the investor or the issuer the choice of currency

Global Bonds

One that is issued simultaneously in several bond markets throughout the world and can be issued in any currency

SEC Rule 144A

Permits qualified institutional buyers to trade privately placed securities without requiring SEC registration. -144a bond issuance has become an important market for non-US borrowers to raise funds

Currency Warrant

Permits that warrant owner to exchange one currency for another at a set price

Equity Warrant

Permits the warrant owner to buy common stock of the issuer at a specified price

A floating rate note issue will either have a _____ maturity date or it will be a ___________

Stated Perpetual issue: aka undated issue, has no stated maturity date

Most important characteristics of a Eurobond

The composition of the underwriting syndicate -Another characteristic is that it is not regulated by the single country whose currency is used to pay bondholders -All are typically registered on a national stock exchange

Domestic Bond Market

Where issuers domiciled in the country issue bonds and where those bonds are subsequently traded

YTM on Annual-Pay Basis

YTM on Annual-Pay Basis = (1 + YTM of bond-equivalent basis/2)^2 -1

Dollar Bloc

US, Canada, Australia, and New Zealand

Eurodollar Bonds

When Eurobonds are denominated in US Dollars

Samurai Bond

Yen-denominated bonds sold in Japan by non-Japanese issuers

Sovereign Bonds

bonds issued by national governments