Therefore, the market is highly dependent on the reputation of the issuer.
The following discussion will see how the Eurobond market has grown since its inception to its current size. The essay will also discuss the current volume of the market and the diversity of the borrowers participating in the market. Finally, the essay will look at the innovations in the Eurobond market with major types of products offered in the market.
The bond market is the primary provider of medium or long-term financing for corporations and the market is dominated by the Eurobonds in the international environment. Prior to the appearance of Eurobonds, long-term capital from international source was raised by floating a bond issue in some other country denominated in the currency and meeting the requirements of the country it was issued in. These are called foreign bonds and the total annual volume was an average of $2.6 billion from the period 1964 to 1974 (Smith, 2003).
The number of foreign bonds increased substantially after 1974 because of the removal of US capital market controls. However, the number of foreign bonds traded is very small compared to the total international bond market. Smith (2003) points to the various reasons which hampered the growth of foreign bonds. These include the fact that issuers had to meet local requirements which caused delays while issuers prepared the necessary documents or permissions. Expenses were also high because of the underwriting fees and other expenses incurred by the issuer.
The 1960s saw the emergence of Eurobonds which rapidly went on to dominate the international bond market. Originally, Eurobonds were unsecured promissory notes denominated in US dollars. They were not registered with US Securities and Exchange Commission (SEC) and therefore could not be sold in US or to US citizens. They were sold to non-US residents, primarily wealthy individuals and foreign institutional investors.
Madura (2006) mentions that the emergence of Eurobond market has been highly influenced by the introduction of Interest Equilisation Tax (IET) by the US government in 1963. This IET of 15% on interest received from foreign borrowers was originally designed to restrict foreign debt sold in US market and discourage investors in US from investing in foreign securities. However, the tax actually stimulated the development of Euromarkets and dollar driven financial activity in London. IET was removed in 1974.
Eurobonds found further boost in 1984 when the US government repealed the 30% withholding tax on interest income paid to foreign persons or corporations. This allowed US corporations to issue bonds directly to non-US investors. Previously, many foreign investors showed reluctance in purchasing US corporate securities as US issuers were required to withhold part of the required interest payments in order to ensure any tax due would be paid. They were also required to disclose their names and addresses to the issuer.
To attract such investors, American companies had to issue bonds in the bearer form through subsidiaries in various tax-haven jurisdictions, such as the Netherlands Antilles (Smith, 2003). Thus removing the withholding tax ensured that foreign investors could