What it means
A Eurodollar is simply a US dollar held in a bank outside the United States. A Eurodollar bond uses that offshore pool of dollars, so the issue is sold to investors in places such as London, Zurich or Singapore.
The bond promises to pay interest and return the principal in dollars. Issuers like the structure for several reasons.
The offshore market typically has lighter registration requirements than a US public offering, and it can be quicker and cheaper. Interest on many of these bonds is paid without deducting withholding tax, which appeals to investors who want to receive the full coupon.
Eurodollar bonds are usually bearer or book-entry securities held through international depositories, and they typically pay interest once a year rather than twice. They come in many shapes, including fixed-rate, floating-rate and convertible versions.
Issues are underwritten by a group of banks that buy the bonds and sell them on to investors. For a corporate treasurer, the value lies in access and diversification.
A company with dollar revenues may prefer to borrow in dollars to avoid currency mismatches. It also reaches a broader group of investors than it might at home.
Pricing is based on the issuer's credit quality and on market interest rates. A strong issuer pays less, while a weaker one has to offer a higher coupon.
After issue, the bond trades in the secondary market and its price moves up and down with rates and perceptions of risk. Investors should check the currency, the legal jurisdiction and the details of ranking in case of default.
Because the bonds sit outside any single country's regulation, the documentation matters more than it might for a domestic bond. Anyone confused by the label should remember that Eurodollar bonds are simply dollar bonds sold offshore.
In practice
Real-world examples.
Example
A Japanese electronics company needs dollars to pay for components bought in dollars. It issues a Eurodollar bond to investors in Europe and Asia, which matches its funding to its costs. The treasurer also likes that the investor base is wider than in the company's home market.
Example
A Mexican utility wants to borrow for ten years without relying on its home market. It sells a Eurodollar bond through an international syndicate and pays the coupon once a year. The issue is listed on an overseas exchange so that institutional investors can buy and sell it easily.
Example
A European bank issues a floating-rate Eurodollar bond to fund its dollar lending. Investors receive interest that moves with a dollar benchmark rate plus a spread. The bank prefers this structure because its own dollar loans also earn floating rates.
Formula
Calculation
Annual coupon = face value x coupon rate; net proceeds = issue price x face value - fees
Worked example: a company issues $100,000,000 of 5-year Eurodollar bonds with a 5% annual coupon. The bonds are sold at 99.5% of face value, and the underwriters charge a fee of 1.5% of face value.
Step 1: Annual coupon = $100,000,000 x 5% = $5,000,000.
Step 2: Gross proceeds = $100,000,000 x 99.5% = $99,500,000.
Step 3: Fee = $100,000,000 x 1.5% = $1,500,000, so net proceeds = $99,500,000 - $1,500,000 = $98,000,000.
The company receives $98,000,000 today, pays $5,000,000 a year, and repays $100,000,000 at maturity. Because it received less than face value, its true cost is a little above the 5% coupon.Case study
Seen in the real world.
Solstice Shipping is a fictional shipping company that earns most of its revenue in US dollars but is based in Europe. Its home bond market was small, and borrowing in local currency created a currency mismatch.
The treasurer arranged a $150 million Eurodollar bond with a 7-year maturity. Investors from several countries bought the issue, which was priced about 0.3 percentage points cheaper than a bank loan.
In this illustrative case, matching dollar debt with dollar revenue meant that currency swings had little effect on the ability to repay. The board noted that interest payments would still rise in cost if the dollar became more valuable relative to the company's reporting currency. The finance team added this point to the quarterly risk report, with a simple table showing the effect of a 10% currency move.
Watch out
Common mistakes.
- Thinking a Eurodollar bond is issued in euros, when it is denominated in US dollars.
- Assuming the bond is regulated like a US domestic issue, when it is sold outside the United States under different rules.
- Ignoring currency effects for a borrower that earns income in another currency.
Questions
People also ask.
What is the difference between a Eurodollar bond and a Eurobond?
A Eurodollar bond is a Eurobond that is denominated in dollars, while a Eurobond can be in any currency.
Why are interest payments annual?
Convention in the international market is for annual coupons, which differs from the semi-annual payments common in the US.
Are these bonds only for big issuers?
In practice yes, because the issue sizes and fees mean they suit large companies, banks and governments. Smaller firms usually borrow from banks instead.
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