Eurobonds refer to debt securities that are issued in a currency other than the currency of the country where the borrower resides. They are issued by multinational corporations, sovereign governments, and supranational organizations, such as the European Investment Bank and the International Bank for Reconstruction and Development. Eurobonds are issued in different currencies, such as the US dollar, Japanese yen, Swiss franc, and British pound, among others. Eurobonds are an effective way to raise funds because they offer a means of diversifying a borrower’s investor base, thereby enabling them to tap into a wider pool of investors. They also offer a way of reducing forex risk.
Forex risk refers to the risk that arises from fluctuations in the value of currencies. When a borrower raises funds in a foreign currency, they are exposed to forex risk because they are liable to pay back the debt in the same currency. If the currency depreciates against the borrower’s domestic currency, the borrower will have to pay more in their domestic currency to service the debt. This can increase the borrower’s debt burden and reduce their creditworthiness. Furthermore, forex risk can also affect the investor’s return on investment, as they are exposed to fluctuations in the value of the foreign currency.
Eurobonds are an effective way of mitigating forex risk because they are issued in a foreign currency, but the repayment of the principal and interest is made in the same currency as the bond. For example, if a US company issues a eurobond denominated in euros, the company will receive euros as the principal and interest payments. Therefore, the company is not exposed to forex risk because they do not have to convert the euros into US dollars. Similarly, if a German company issues a eurobond denominated in US dollars, the company will receive US dollars as the principal and interest payments. Therefore, the company is not exposed to forex risk because they do not have to convert the US dollars into euros.
Eurobonds also offer a way of diversifying a borrower’s investor base, thereby reducing their exposure to forex risk. When a borrower issues a eurobond, they can target investors from different countries and regions. For example, a US company issuing a eurobond denominated in euros can target investors from Europe, Asia, and the Middle East. This enables the company to tap into a wider pool of investors and reduces their exposure to forex risk. If the company had issued a bond denominated in US dollars, they would have been exposed to fluctuations in the value of the US dollar.
Eurobonds also offer a way of reducing the cost of borrowing for the borrower. When a borrower issues a eurobond, they are tapping into a wider pool of investors, which enables them to achieve a higher credit rating. This, in turn, reduces the cost of borrowing because investors perceive the borrower as having a lower default risk. Furthermore, eurobonds are typically issued with longer maturities than domestic bonds, which can reduce the cost of borrowing for the borrower.
In conclusion, eurobonds are an effective way of mitigating forex risk for borrowers. They allow borrowers to raise funds in a foreign currency but repay the debt in the same currency as the bond. Eurobonds also offer a way of diversifying a borrower’s investor base, thereby reducing their exposure to forex risk. Furthermore, eurobonds can reduce the cost of borrowing for the borrower because they allow them to tap into a wider pool of investors and achieve a higher credit rating. Therefore, eurobonds are an attractive financing option for multinational corporations, sovereign governments, and supranational organizations.
