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
