What it means
In finance, a euronote is a promise to repay a sum on a set date, issued outside the home market of the currency it is denominated in. For example, a company might sell notes in US dollars to investors in London or Singapore.
The "euro" prefix here refers to the old name for the offshore market, not to the euro currency. Companies like euronotes because they can borrow from many investors at once, often at rates close to those that banks pay each other.
The notes usually have short maturities, such as 30, 90 or 180 days, and are sold at a discount to their face value. The investor earns the difference between the discounted price and the amount repaid.
Banks often help by underwriting the programme, which means they commit to buy any notes that investors do not take. This is why euronote programmes are sometimes arranged in combination with a standby credit line.
The line gives the issuer a back-up if the market is unwilling to buy. Euronotes sit within the family of eurocurrency instruments, which also includes euro commercial paper and euro medium-term notes.
The shorter ones resemble commercial paper (unsecured short-term corporate IOUs), while longer ones resemble bonds. Each programme has its own documentation and rating requirements.
For a treasurer, the attraction is flexibility. A company can issue when it needs cash and repay when it has spare funds, tapping the same programme repeatedly.
The main risk is refinancing risk, because if investors lose confidence the issuer may struggle to roll over its notes. Investors should check the credit quality of the issuer, the currency of the note and the legal terms.
Because these instruments trade in large denominations, they are mainly held by banks, funds and corporate treasuries rather than by individuals.
In practice
Real-world examples.
Example
A multinational manufacturer sells 90-day dollar notes to investors in London to fund working capital. The notes are issued at a discount, and the company repays the full face value at maturity. The treasurer compares the effective cost with the company's bank overdraft before deciding how much to issue.
Example
A Japanese bank arranges a euronote programme for a utility company. The programme lets the utility issue notes whenever it needs cash, backed by a standby facility from a group of banks.
Example
A government agency raises funds in an offshore market in a foreign currency to finance imports. The treasurer compares the cost with a domestic bond and chooses the cheaper route after allowing for currency risk. The decision is documented for the finance committee, together with the plan for repayment on the due date.
Formula
Calculation
Issue price of a discount note = face value x (1 - discount rate x days to maturity / 360)
Worked example: a company issues euronotes with a face value of $10,000,000 for 90 days at a discount rate of 3%.
Step 1: Time fraction = 90 / 360 = 0.25.
Step 2: Discount factor = 1 - (0.03 x 0.25) = 1 - 0.0075 = 0.9925.
Step 3: Issue price = $10,000,000 x 0.9925 = $9,925,000.
The company receives $9,925,000 today and repays $10,000,000 in 90 days. The cost of borrowing is $75,000 for the quarter, which works out to about 3.02% annualised on the money actually received (75,000 / 9,925,000 x 4).Case study
Seen in the real world.
Redcliff Energy is a fictional oil services company that needs about $50 million of extra working capital for six months each year. Its bank loan carried high fees and a rigid repayment schedule.
The treasurer set up a euronote programme with a standby credit line. Each spring, Redcliff sold 90-day notes and rolled them over once, paying about 0.4 percentage points less than the bank loan.
In this illustrative story, the arrangement worked well until market conditions weakened and investors demanded higher yields. Because the standby line was in place, Redcliff was able to draw on it instead of selling notes at an unattractive price. The treasurer later reported to the board that the line cost about 0.15% a year in fees, which she judged to be cheap insurance.
Watch out
Common mistakes.
- Confusing a euronote with a euro banknote, when the first is a debt instrument and the second is paper currency.
- Assuming the "euro" prefix means the note is denominated in euros, when it describes the offshore market.
- Ignoring refinancing risk, which arises if the issuer cannot sell new notes to repay the old ones.
Questions
People also ask.
Who buys euronotes?
Mainly banks, investment funds and corporate treasuries, because the notes are issued in large amounts.
Why do issuers add a standby credit line?
It gives them a back-up source of cash if investors are unwilling to buy new notes. The cost is a commitment fee, which is usually small compared with the risk it removes.
Are euronotes the same as commercial paper?
They are similar in short maturities and discount pricing, but euronotes are issued in the offshore market under a programme that often includes bank underwriting.
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