Brian Scott Quinn

United Kingdom Financing in the Eurobond Market

Until 1971 the volume of eurobond issues by United Kingdom entities was relatively small, but in both 1971 and 1972 the volume was substantial and exceeded that for any other country except the United States. In 1973 for the first time, the United Kingdom was a larger borrower than any other country. The volume of funds raised by United Kingdom borrowers in these three years, as well as being large in terms of total eurobond market volume, was large in relation to the total of fixed interest funds raised in the United Kingdom domestic market (see tables 15 and 16).

Interest Rate Levels and Differentials

This chapter is concerned not with the general determinants of interest rates but with the special features determining interest rates in the eurobond market (a full treatment of interest rate theory can be found in for example Conard).1 The approach taken will be based on loanable funds theory, as liquidity preference theory does not seem particularly appropriate in this particular market in which the reasons for investment differ greatly from those in a conventional national market, as explained below.

Foreign Bonds to Eurobonds

The world of international finance in the postwar era has been very different from that existing before the war and has been changing at a very much faster rate.

Who Uses the Euromarkets and Why

The reasons for the public sector of an economy making use of foreign sources of funds are in general quite different from those applying to the private sector. All governments have the power to tax their residents, and for most governments this is their main source of funds. All public sector needs could be met through this channel provided this had no repercussions on other parts of the economy. In practice most governments deem it to be politically undesirable to raise all the funds required this way. The alternative to raising revenue through taxes is to borrow. Such borrowing can be on the domestic capital market if such a market exists, or on a foreign capital market. In many countries which choose to raise funds abroad, it would be quite practicable for the government to raise all the funds in the domestic market particularly since the credit standing of the government will almost always be higher than that of any private sector borrower. However any government borrowing is inevitably competing for the same funds as the private sector. Since private sector borrowing is generally thought to be essential to the growth of the economy, the government will often be reluctant to borrow such an amount as would result in ‘too high’ an interest rate. To avoid this the government may borrow abroad. It might be contended that the government should obtain all its requirements on the domestic market and let the private sector use foreign markets. In practice however this would not work so well. The eurobond market is ‘prime risk’ only, and while any developed country government can raise funds, only a small proportion of any country’s business firms would be sufficiently good risks to do so. In a country with a shortage of domestic capital, borrowing abroad by the public sector may thus be a better and cheaper solution to the problem than an attempt by the private sector to borrow abroad the same amount.

Eurobonds and Euroequities

By far the most important instrument in the eurobond market is the straight bond, generally dollar denominated. Only in two years, 1968 and 1969, when United States companies were particularly active on the borrowing side, did convertible issues amount to more than a small proportion of total issues. The dominance of bond finance over equity or convertible finance arises for a number of reasons:

Currencies Used for Denomination

By far the most important currency in use in the eurobond market for denominating eurobonds is the United States dollar. Before exploring the reasons for this however it is worthwhile examining the role of ‘key’ currencies.

Other Borrowers in the Eurobond Market

Borrowers in approximately thirty-eight countries have made use of the eurobond market since 1968 (see table 3). However many of these have made only one or a few issues. The borrowing countries that are discussed below are those that have made extensive use of the market or whose borrowings have features of special interest.

Multi-Currency Options, Indexed Loans, European Currency Unit, European Unit of Account, the Eurco

As well as denominating bond issues in a single national currency, it is possible to denominate in two or more currencies or in an artificial unit (unit of account).

The Genesis of the Roll-over Credit

An examination of the data on issues volumes for the eurobond and eurocurrency markets reveals an extremely rapid growth of the latter particularly at the time the former was declining (see table 1). The sector of the eurocurrency market that has shown most growth in the last few years has been medium-term lending, i.e. lending at up to say twelve years. Such loans are competitive with bond issues and over the last few years have been attractive for many borrowers who traditionally would have required bond finance. Most studies of the eurocurrency market have considered it only as a short-term market and have focused attention on interbank aspects rather than on the final loan to a non-bank borrower. From the point of view of this study however interest in the market centres mainly round its role as a source of medium-term funds and its interrelationship with the eurobond and foreign bond markets.

Financing in Eurocurrencies

An analysis of borrowers in this market as was done for the bond market is not possible because of the lack of information. The discussion of borrowers must therefore be in terms of those whose loans have been publicly announced. Most loans which are publicised are mentioned in the Financial Times new issues column, but the most useful source is the Rothschild Intercontinental Bank Report in Euramioney. This has been published since the end of 1970.