November 1969

A Brief Survey of

(2 ) u n d erw ritten b y a n a tion a l sy n d ica te , and

(3 ) sold p rim a rily to in v e sto rs in that co u n try .
W hereas a foreign bond issue is subject to all laws
and regulations of the country in which it is sold,

THE EUROBOND MARKET

The 1960s have witnessed a number of changes
and innovations in the m oney and capital markets,
both at home and abroad. N ot the least of these has

a E urobond issue is generally exempt.

been the m eteoric rise of the E urobond market. This

unregistered, bonds to protect the anonym ity o f the

investor.
If the borrow in g corporation fulfills the

market is not, as the name implies, confined e x

In fact, the

E urobond market is virtually free of any direct regu

lation or control. A ll E urobonds are bearer, or

clusively to E urope or European participants, but is

regulations of the country in which it is incorporated,

an international capital market utilized extensively

in the recent past by U . S. corporations.

income taxes need not be withheld from interest pay

ments. T he tremendous popularity of E urobonds

Origins of the Market

P rio r to the em e rg e n ce

of the E urobond market in 1963-64, borrow ers who

with investors can be explained in large part by the

ease with which taxes on them may be evaded.

wished to float issues outside their own national

Marketing a Eurobond Issue

borders chose a particular national market for the

sale, such as the U . S. or Switzerland, and denom i
nated all the bonds in the currency of the country
chosen. Until 1963, N ew Y o rk was the principal

problem s attends each flotation of E urobonds because

market for foreign bond flotations. W h ile U . S. in

vestors were the chief purchasers of these bonds, they
became increasingly attractive to foreign buyers be
cause their yields frequently exceeded those on bonds
sold domestically by the same borrow ers.

In addi

tion, foreigners considered dollar-denominated assets

attractive in their own right. The im position of the

sp ecia l set o f

the bonds must be attractive to investors o f many

countries. T he quality of the borrow er, the stability
and convertibility of the currency chosen, and free
dom from national taxation are am ong the principal
concerns o f potential investors. Principally in order
to avoid tax withholding requirements, most A m e ri
can corporations and some European ones establish
separate international financing subsidiaries, often
solely for the purpose of raising funds in the E u ro
bond market.
A lthough U . S. subsidiaries are

Interest Equalization T a x in July 1963, however,

spelled the end of N ew Y o rk as a m ajor foreign bond

usually incorporated in Delaware, L uxem bourg and

market. This tax is levied as a percentage o f the pur

chase price of a foreign security. W h ile it is paid by
the purchaser, in the case of bonds it generally is
shifted to the foreign seller w ho must offer a c o r

parent com pany generally guarantees bonds sold by

the subsidiary.

respondingly higher yield to attract U . S. investors.

M eanwhile, British authorities had been preparing
the ground for the rebirth of London as the principal
international capital market by easing pertinent legal
restrictions and reducing certain taxes.
Due to
balance of payments problems, however, the au

a n d /o r

thorities severely restricted access to the British bond

where from 50 to 100 firms assist in the marketing o f

the Netherlands Antilles are also popular bases. T he

A typical E urobond issue is sponsored by a syndi

cate com posed of four or five leading European banks
U.

S. investment houses.

T he managing

group then selects perhaps 20 to 50 m ore financial

institutions from several countries to assist in the
underwriting operation. These firms, in turn, form
selling groups in their own countries or areas to
effect the final placement of the issue. Thus, any

market to a preferred list of Commonwealth b o r

each E urobond issue, regardless of its size.

rowers.

most single institutions reach a relatively small num

The dollar-denominated bonds sold in M ay

Because

1963 by the Belgian governm ent through the London

ber o f investors, a large number of firm s is necessary

market, principally to n on-U . S. investors, may be

to tap effectively the multinational market. F urther

considered the first true E urobond issue.

more, the European capital market has very few

Nature of a Eurobond

E urobon d

issue

is

marketed by an international syndicate simultaneously

in a number of different countries.

A ll the bonds in

a given issue are denominated in the same currency.

large institutional investors.

O nce placed, the bonds

may be delivered simultaneously in several cities, but

payment is generally in one city.

Payment in dollar-

denominated securities is always in N ew Y ork .

E urobonds are generally sold to investors in countries

Demand for Eurobonds

other than the one in whose currency they are de

attracted by the high quality, high yield, and v ir

nominated.

tually tax-free nature o f Eurobonds.

In these respects a E urobond differs

W e a lt h y in d iv id u a ls are
The

Chase

from a foreign bond issue which is ( 1 ) denominated

Manhattan Bank estimates that 7 0 % to 8 0 % of m ost

in the currency of the country in which it is sold.

issues is bought by individuals. The identity o f these

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Federal Reserve Bank of St. Louis

November 1969

individuals is harder to establish, however. A m eri

cans are discouraged from investing in E urobonds as
such purchases are subject to the Interest Equaliza
tion T a x. W h ile undoubtedly a number of A m eri
cans do buy E urobonds through Swiss or other
foreign banks, thereby evading this tax, they ap
parently do not constitute a m ajor class o f investors.

The Market 1964-1967 B e tw e e n 1964 and 1967

the volum e of E urobond offerings expanded steadily
from $700 million to $2.0 billion. D uring these years
the center of activity shifted first from L ondon to

British citizens are seriously hampered in the pu r

chase of any dollar-denominated straight debt asset
by foreign exchange controls. Until recently, h ow

active in the N ew Y o rk foreign market, continued to

be am ong the most frequent borrow ers. International

ever, other m ajor European countries outside Scan

L uxem bourg, and then diffused to include N ew Y o rk

and G erm a n y . S ca n d in a via n g o v e r n m e n ts and
private Japanese corporations, both o f which had been

institutions, particularly the European Coal and Steel

Com m unity and the European Investment Bank, also

dinavia placed no restrictions on the flow of funds

utilized the market. A s shown in the chart, however,

into the E urobond market.

Based on the origin of subscriptions, Switzerland

private non-U . S. corporations were the dominant

group of borrow ers until 1968. D uring these years,

is the most important source o f E urobond demand,

accounting for one-quarter to one-third of all pur

the proportion o f E urobond offerings denominated

in dollars climbed to about 9 0 % , with long-term
straight debt the m ost popular type.

chases.

A recent study by N. M . Rothschild & Sons

estimates that 6 0 % to 7 0 % of these bonds ultimately

In 1965, U . S. corporations entered the E urobond

is placed with n on-Sw iss residents.1 Italy, Belgium,

and the Netherlands have been important sources o f
demand at various times. Germany has been a m ajor
purchaser since early 1968 when E urobond rates

market for the first time.

exceeded domestic long-term rates.

ments position.

1 N. M. Rothschild & Sons, The Eurobond M arket. A study on

issuing and trading o f Eurosecurities prepared at the request o f
H igh Level Standing Group on Capital Markets o f the Business
Industry A dvisory Comm ittee to the Organisation for E conom ic
operation and Developm ent.
February 1969. p. 9.

the
the
and
Co

EUROBOND

In February o f that year,

the U . S. Government had requested voluntary co m

pliance by m ajor U . S . corporations to a set of guide
lines designed to im prove the U . S. balance o f pay
These guidelines curtailed direct e x

ports of capital for overseas development.

In their

search for capital, these corporations turned first to

overseas banks for credit, and, in the latter part of

FLOTATIONS

$ Bil.
BY TYPE OF

BORROW ER

3.5 -

3 .0

U. S. Com panies

Other Com panies

[3 Governm ents
0

International
O rganizatio ns

2.5

1.5

1.0
1965

1966

1967

1968

Jan .-

1965

1966

1967

July

1965

1966

1967

1968

U. S. Dollar

W est G erm an Mark

Other

Jan .Ju ly
1969
Digitized for FRASER
Source: M organ G u ara n ty Trust Com pany of N ew York.

http://fraser.stlouisfed.org/
Federal Reserve Bank of St. Louis

1969

[~~1 Long-Term Straight

g

Medium-Term Straight
and N egotiable CD's

Convertible

1968

Jan .Ju ly
1969

November 1969

the year, to the E urobond market. E urobond sales

by U . S. corporations constituted about one-third o f
the total in 1965, a proportion which was not e x
ceeded until 1968. A s a corollary to the entrance
o f U . S. borrow ers, N ew Y o r k underwriters soon
became prominent in E urobond syndicates.
Events in 1968

issues dipped to 7 2 % of the total, with issues d e

nominated in W est German marks rising from 8 %
in

In 1968, the E u r o b o n d m arket

was deluged with offerings by A m erican companies

and the volum e of E urobond sales surpassed the com
bined total of the preceding tw o years.

its preferred position as the currency o f denom ination

for E urobonds. Despite the fact that all convertible
issues were denominated in dollars, dollar E urobon d

T he surge in

U . S. borrow in g was triggered by the replacement o f

voluntary balance of payments controls with m ore
stringent mandatory ones on January 1, 1968. U nder
the new controls, U . S. corporations were forced to
rely almost exclusively on overseas borrow in g to fi
nance their foreign operations. Am erican companies
accounted for $2.1 billion of the $3.6 billion total o f

1967 to 2 5 %

in

1968.

T he

m arks g row in g

popularity reflected investor confidence in the mark

and the desirability of holding such bonds should
the mark be revalued. B orrow ers were attracted by
the

significantly

low er

interest cost

of

m ark-de

nominated bonds com pared to dollar bonds.

Recent Developments A fte r a fast start in 1969
during which the trends of the previous year were
accentuated, the E urobond market staggered and then
stalled.
T otal E urobond offerings dropped from
$1.2 billion in the first quarter to $0.5 billion in the

E urobonds sold in 1968.

This dramatic change in the com position o f b o r

second. Several developments contributed to this d e

cline.
H igh and rising interest rates discouraged
some borrow ers and diminished the appeal o f lo n g

rowers was accompanied by an equally abrupt switch

term straight debt investments, as many investors

in the types of bonds sold. T he market fo r long-term

preferred short-term paper.

straight debt, which had hitherto absorbed the pre

term E urodollar market, which offered rates o f re

In particular, the short

ponderance of E urobond issues, apparently could not

turn in excess of 10% for 3-m onth deposits, rep

handle com fortably the influx o f new issues at the

prevailing interest rates, and most borrow ers were

resented keen com petition.

unwilling to pay substantially higher rates.

R ising interest rates on

mark-denominated bonds made them less attractive

W h ile

to bond sellers as the threat of revaluation was no

some borrow ers shortened the maturities on their

straight debt issues to insure successful sales, a m a

longer countered by a significantly low er interest

cost.
Concurrently, convertible issues became less

jority turned to bonds which were convertible into

com m on stock o f the parent com pany. T he net result

alluring to investors as U . S. stock prices plunged.

T w o other factors contributed to a slow dow n in o f

was that over half of the total volum e o f Eurobonds

sold in 1968 was convertible, com pared to 13% in

ferings by U . S. co rp o ra tio n s: direct foreign invest

ment controls were eased somewhat, thereby lessen
ing their dependence on the E urobond market, and
the heavy borrow in g of 1968 undoubtedly alleviated
the immediate need for new funds. Finally, G er

1967, and 8 6 % of all convertibles were sold by U . S.

companies. Indeed, virtually the entire grow th in the
E urobond market in 1968 was attributable to co n
vertibles as sales of long-term straight debt actually
declined.
Convertibles were fairly new to the international
bond market and proved to be extrem ely popular.

many, Italy, and Switzerland adopted measures re

stricting to some degree the volum e o f E urobonds
sold within their borders. These countries acted to
protect their relatively low er long-term dom estic

T h e special appeal of a convertible bond lies in the

interest rates and to insure the availability o f su f

com bination of a g ood yield as protection in a bear

ficient capital for dom estic investment.

market and the capital gains potential should the

share price of the com panys stock rise.

W ith U . S.

Conclusion

T h e fu tu re g r o w th and d ire ctio n o f

stock prices generally rising at that time, the co n

the E urobond market depends to a large extent on

version

Several

the health and stability o f m ajor currencies and the

mutual funds com posed solely of convertible E u ro

willingness of nations to permit foreigners to tap

bonds were launched.

their domestic sources o f investment funds.

option

was

also

highly

valued.

Sellers of convertibles ap

parently felt that the risk o f future equity dilution

T he

ever-expanding list of new borrow ers drawn to the

was m ore than offset by the ease of procuring funds

E urobond market and the variety o f instruments

at considerably low er interest rates than those pre

offered suggest that the market will continue to play

vailing on straight debt issues.

W h ile U . S. borrow ers dominated the E urobond
market in 1968, the dollar slipped somewhat from
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10

an important and unique role in international finance

as long as underlying conditions are favorable.
Jane F . N elson