What is International Bonds? Eurobonds, International Debt Finance for Indian Corporates

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What is International Bonds?

International bonds, also known as foreign bonds or sovereign bonds, are debt securities issued by a country’s government or a corporation in that country to raise capital from investors outside its borders. These bonds are typically denominated in a foreign currency, such as the U.S. dollar, Euro, or Japanese yen, and are sold to investors in various countries.

The international bonds market can be classified into foreign bond markets and Eurobond markets. Eurobonds are the bonds issued in a particular currency but sold to investors in national capital markets other than the country that issued the currency in which bonds are denominated.

For example, if a US MNC raises debt capital in US dollars from financial markets based out of London from investors in countries other than the US, these are termed as Eurobonds. Foreign bonds are issued by a foreign borrower (non-residents) to the investors in a national capital market (residents) in their own currency.

For example, if an MNC based out of London issues US dollar denominated bonds in US bond markets, then these are termed as foreign bonds. The foreign bonds are subject to the regulations of the borrowing country. If a UK company issues US dollar denominated bonds in the US financial markets, these are termed as foreign bonds and will have to go through the registration and disclosure formalities of the US Securities and Exchange Commission (SEC). In contrast, Eurobond markets are less regulated and these bonds need not comply with the regulatory restrictions that apply to domestic issues.

For example, if the same UK company issues the US dollar denominated bonds outside the US, these are referred to as Eurobonds and will not come under the purview of SEC. In order to make the US bond markets more competitive, the SEC instituted Rule 144A that allowed ‘Shelf registration’. Though this does not provide exemption to all the related SEC regulations, this mode can allow foreign companies to issue bonds rapidly in the US markets. Through Rule 144A provision, foreign companies can privately place bond issues with Qualified Institutional Buyers (QIBs) in the US.

Since these are not issued to the general public in the US, but to qualified financial institutions capable of due diligence (as defined by SEC), the disclosure requirements are not as strict as in the case of public bond issues. The foreign bonds issued in different countries are termed by different names. For example, foreign bonds issued in the US are called Yankee bonds. Similarly, those issued in Japan, UK, Spain, Netherland are called Samurai bonds, Bulldog bonds, Matador bonds and Rembrandt bonds, respectively. The Yankee bonds are the largest segment of foreign bonds followed by those in euros, Swiss francs and Japanese yen.

Before the advent of European Monetary Union (EMU), the term Eurobond meant a type of security that can be sold in any convertible currency, by issuers domiciled in any European country. It now includes all bonds issued in a currency different from the domestic currency of the investors. In Europe, the domestic corporate securities have now given way to Eurobonds. The Eurobond markets have evolved over time. It started mainly with bonds denominated in US dollars. In 1960s, the domestic and foreign bonds issued in the US attracted withholding tax on interest payments.

What is Eurobonds?

Eurobonds are a type of international bond denominated in a currency different from the currency of the country or countries in which they are issued. They are often called “Eurobonds” because the first such bonds were issued in Europe, primarily in the 1960s. However, it’s important to note that Eurobonds are not limited to the European continent; they can be issued by entities from anywhere in the world and can be denominated in various currencies.

This was not applicable if the same bonds were issued outside the US. Secondly, the Eurobonds were of the nature of bearer securities. This implied that bonds can be issued at lower yields in Eurobond markets than in the US markets. Eurobond markets continue to thrive due to untaxed, unregulated environment in which it is issued and traded, though the withholding tax is not applicable anymore. The Eurobonds can be denominated in any of the major currencies, such as euro, dollar, Swiss francs or pound sterling, etc.

The Eurobonds denominated in US dollars are called Eurodollar bonds while those in pound sterling are called euro sterling bonds, etc. Eurobonds are generally issued through a syndicate of banks and distributed internationally. The borrower first invites the investment banks to bid for the role of lead manager. The bidding banks indicate the price at which they think they can place the issue with the investors. The issuer decides on the lead manager based on the bids, reputation and marketing capability. The lead manager appoints a syndicate of other banks from different countries.

If the issue is underwritten, the lead manager guarantees to take the entire issue irrespective of the investor demand. Usually, the primary issue is on the basis of “fixed price fixed re-offer” scheme. As per this practice, the lead manager forms the syndicate agreeing to a fixed issue price, fixed commission and distribution amongst the syndicate members based on the respective quantum of issue agreed upon. Then only the participating banks re-offer the bonds they have been allotted to the market at the agreed price. The borrowing costs of Eurobond issue involve fees and expenses apart from interest rate applicable on the bond.

The fee depends on the maturity, credit quality and size of the issue and is deducted fromthe sale proceeds. The expenses could include printing costs, legal expenses, stock exchange listing fees, promotion-related expenses and underwriter expenses.

The Eurobonds have a typical maturity period of five to ten years with most of them being issued for a period of five years and some even for thirty years or more. These are issued as unsecured bearer bonds and do not attract any tax on interest payments.

Types of Eurobonds

The Eurobonds can be of different types as follows:

Plain Vanilla Bonds

These are conventional fixed interest fixed maturity bonds in which the interest is payable annually. The face value of bonds is usually in terms of 1000 units of the bond currency.

Floating Rate Notes (FRN)

These are of floating interest rate type based on LIBOR reference rate and credit spread applicable for the borrower. The interest is generally payable semi-annually. The maturity period could be for short to medium term.

Zero-coupon Bonds

These bonds are issued at discount and redeemed at par with no intermediate interest payments. Depending on the jurisdiction, the return on these bonds can be considered income or capital gains and taxed accordingly.

Convertible Bonds

These Eurobonds can be exchanged for the equity of the issuing company at some future date. The conversion to equity can be at the option of the bondholder. The price at which the bonds can be converted into equity shares of the issuing company is normally set at premium to the market price of the shares on the issue date. Owing to this added attraction, the convertible bonds can be issued at lower coupon.

International Debt Finance for Indian Corporates

Indian companies can access international bond markets subject to the RBI regulations. The current regulations does not permit Indian corporates to access international debt markets for short-term debt of maturity less than three years. As per the regulations prevailing as on September, 2015, Indian companies have the following modes of international debt financing.

External Commercial Borrowings (ECBs)

These are the borrowings from international credit and bond markets with minimum average maturity of 3 years. These can be in the form of:

  • Commercial bank loans

  • Buyer’s or supplier’s credit

  • Debt instruments, such as straight bonds, FRNs, etc.

  • Credit from official export credit agencies

  • Commercial borrowings from the private sector window of multilateral financial institutions, such as IFC, ADB, etc.

  • Investment by Foreign Institutional Investors (FIIs) in dedicated debt funds

Foreign Currency Convertible Bonds (FCCBs)

These are the bonds issued by an Indian company expressed in foreign currency in which the interest and principal are payable in foreign currency. These can be subscribed by a non-resident in foreign currency convertible into ordinary shares of the issuing company either in whole or part on the basis of equity warrants attached to the debt instruments.

Preference Shares

These can be non-convertible, optionally convertible or partially convertible and are subject to the regulations pertaining to ECBs. These instruments are denominated in INR and rupee interest rates are based on the swap equivalent of LIBOR plus the spreads as permissible for the ECBs of corresponding maturity.

Foreign Currency Exchangeable Bonds (FCEBs)

These are similar to FCCBs, but convertible into equity shares of another company.

The major features concerning ECBs under automatic route are listed as:

  • The ECBs can be accessed through two routes viz., automatic route and approval route. The borrowings for the real sectors, such as industrial sector, infrastructure sector and specified service sectors do not require RBI/government of India approval, i.e., they form a part of the automatic route.

    The eligible borrowers are specified by the RBI and includes companies of specific industries, Non-Banking Finance Companies (NBFCs) pertaining to infrastructure finance and asset finance, housing finance companies, etc.

  • Indian companies can raise funds from internationally recognised sources, such as international banks, international capital markets, multilateral financial institutions, and export credit agencies, suppliers of equipment, foreign collaborators and foreign equity holders subject to related regulations.

  • The maximum amount of ECB allowed for a corporate is USD 750 million (for corporates in services sector, such as hotels, hospitals and software, it can be up to USD 200 million). ECB proceeds cannot be used for the acquisition of land.

  • The minimum average maturity is 3 years for ECBs up to USD 20 million and five years for ECBs above that.

  • ECBs denominated in INR are now allowed.

  • There are restrictions on the cost of ECBs that can be raised. The all-in-cost ceilings are specified as follows: for maturity period of 3 years, the ceiling over 6-month LIBOR is 350 basis points. For more than 5-year maturity, it is 500 basis points.

  • The regulations specify the end-use applicable for ECBs. It includes import of capital goods, new projects, modernisation and expansion of existing production units. ECBs cannot be used for investment in capital markets, money market funds or for acquiring a company in India.

  • The choice of security to be provided to the overseas lender is left to the borrower

Separate guidelines have been provided for ECBs eligible through approval route. The FCCBs that can be raised by Indian companies are also subject to all the regulations applicable for ECBs. The FCCBs should have minimum maturity of five years and any call or put options cannot be exercised before five years. In addition they cannot have warrants attached.

Table gives a snapshot of top ten companies that have raised international debt in the month of July, 2015 alone:

Data on ECB/FCCB for the month of July 2015
I Automatic Route*
BorrowerEquivalent Amount in USDPurposeMaturity Period(Appx)
1ECBJSW Steel Limited #15,00,00,000Overseas Acquisition5 Years 6 Months
2ECBHospira Healthcare India Private Limited #10,00,00,000Rupee Expenditure Loc. CG5 Years 10 Months
3ECBIdea Cellular Limited #7,20,00,000Refinancing of Earlier ECB2 Years 10 Months
4ECBBharat Oman Refineries Limited #7,00,00,000Refinancing of Earlier ECB5 Years
5ECBL&T-MHPS Turbine Generators Private Limited #4,80,36,206Refinancing of Earlier ECB6 Years 1 Month
6ECBShree Cement Limited4,00,00,000New Project5 Years
7ECBHyosung T&D India Private Limited2,80,00,000New Project7 Years 1 Month
8ECBHighly Electrical Appliances India Private Limited2,50,00,000General Corporate Purpose7 Years 9 Months
9ECBTVS Motor Company Limited2,00,00,000Modernisation3 Years 5 Months
10ECBCoffee Day Global Limited #2,00,00,000Rupee Expenditure Loc. CG5 Years
Automatic Route Total57,30,36,206
II Approval Rout
1ECBAdani Ports and Special Economic Zone Limited52,10,00,000Refinancing of Earlier ECB5 Years
2ECBHousing Development Finance Corporation Limited50,00,00,000On-lending/Sub-lending.
5 Years
1 Month
3ECBRural Electrification Corporation Limited30,00,00,000On-lending/Sub-lending.5 Years
4ECBAdani Ports and Special Economic Zone Limited12,90,00,000Ports5 Years
5ECBIBC Solar Projects Private Limited3,08,134General Corporate Purpose7 Years 7 Months
Approval Route Total1,45,03,08,134
Grand Total2,02,33,44,341
The Quantum of International Debt Raised by Indian Corporates in July 2015

Foreign Currency Convertible Bonds (FCCB)

These are the bonds issued in foreign currency by Indian corporates and are convertible into equity shares of the issuing company at a future date at a pre-determined price. It allows Indian corporates to raise debt finance in foreign currency using a debt cum equity hybrid financial instrument. The investors would receive coupon on the bonds, such as straight bonds, but have the option of participating in the growth of the issuing company in terms of any significant price appreciation by converting the bonds into equity shares. Separate policy guidelines are issued by the RBI for raising capital through FCCBs.

Following are the main advantages of FCCB:

  • Investors have the option of treating the FCCB as a straight bond and receive coupon and principal repayments even if the share price does not appreciate as per expectations.

  • Corporates would prefer FCCBs as it delays any dilution of equity.

  • FCCBs are cheaper for corporates as they can carry lower coupon when compared to straight bonds.

However, FCCBs have certain disadvantages as well. These include:

  • Interest payments in foreign currency imply that any currency depreciation can significantly increase the cost of borrowing.

  • If the bonds are not converted into equity shares, principal repayment in foreign currency also involves exchange rate risk.

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