Bond issues are a primary category of transactions within capital markets, and represent a specific type of capital market instrument. They provide a substantial method of capital acquisition in global financial markets and come in various shapes and sizes. A bond issue may serve as a mechanism for a State, institution, or commercial entity to acquire funding. Alternatively, they are a component of a structured finance transaction, when a special purpose vehicle issues bonds to generate capital for acquiring a portfolio of debt or debt instruments. Eurobonds are conventionally characterised as bonds issued and predominantly sold outside the domestic market of the currency in which they are denominated. Consequently, bonds denominated in dollars and issued in London would qualify as eurobonds.
Eurobonds are generally sponsored by a consortium of multinational banks, exempt from withholding taxes on coupon payments, and frequently issued as bearer instruments, meaning no ownership registry is maintained. Technically, 'bonds' are debt securities with a duration from issuance to maturity beyond about five years, which either accrue interest at a fixed rate or do not accrue interest whatsoever.
A bond issue appeals to the issuer since it facilitates the acquisition of funds from a broader spectrum of investors compared to conventional bank financing. Consequently, it should be feasible to get the funds at a lower cost than through bank borrowing. From the viewpoint of bond-holding investors, by purchasing and retaining the bonds, they should secure a superior rate of return compared to depositing their funds in a bank. It is also feasible to customise issues to attract investors with varying preferences for their investment plans.
Moreover, bonds and Eurobonds offer appealing flexibility and liquidity, allowing investors to buy and sell them at will. This indicates that the identity of bondholders may regularly change, and that, in its conventional form, the legal connection at any given moment will exist between the issuer and the current bondholder.
A bond issue entails extensive documentation, including the prospectus or listing particulars, subscription and initial issuance of the securities, the rights and obligations of the issuer, any guarantor, bondholders, any provided security, and logistical details regarding interest and principal payments. Moreover, it is pertinent to include terms that explicitly designate the governing law and jurisdiction for any future disputes that might arise from the contractual documentation.
A crucial element in the prospectus is the initial rating assigned to an issue, which may fluctuate over time, either increasing or decreasing, so providing investors with an indication of the associated risk level they are accepting. In addition to providing an overview of the risks linked to an investment, ratings are significant because certain investors, such pension funds, are prohibited from investing in or retaining assets with ratings below investment grade.
Although the terms and conditions of bonds often lack representations and warranties, the overall group of bondholders may get some security assurance from the prospectus.
The investors' demand for liquidity, defined as the capacity to transact substantial quantities of bonds before maturity with no impact on pricing, has resulted in the establishment of a significant secondary market for eurobonds. The secondary market is predominantly an over-the-counter market, despite the fact that the majority of eurobonds are listed on the London or Luxembourg Stock Exchanges. Listings are typically acquired due to restrictions preventing certain institutional investors from purchasing unquoted shares.
Syndicated loans and bonds are significantly competitive financing sources from both banking and capital markets. Capital markets have generally been increasing their market share. Nonetheless, with the advent of "mezzanine" finance, a form of severely subordinated debt utilised in leveraged buyouts, loans appear to be re-emerging. Although loans are costlier for the borrower, they offer call flexibility, allowing refinancing after two years, whereas a ten-year high-yield bond is typically non-callable for five years.