Oh Mr Bond, your euro is just so sexy
Sunday 27 April 1997
The dispute was about whether you can legitimately sell a bond claiming that it's denominated in euros, almost two years before Europe is scheduled to begin using the new currency.
The borrower claimed his new bond was really and truly denominated in euros, because the documentation for the issue guaranteed investors would start to receive interest and principal payments in euros if some European countries junk their national currencies in exchange for a new common currency. Until that happened, it would pay out like any normal bond in one of the existing European currencies.
While I can claim logic is on my side in arguing that you can't, with a clear conscience, try to flog investors a bond in a currency that not only doesn't exist, but might never exist as anything but a virtual currency, the bond market is trying its damnedest to prove me wrong. In bondland, the euro is already a reality.
Since the beginning of the year, the market for bonds claiming to be denominated in euros has exploded.
More than $6.7bn (pounds 4.1bn)-worth of bonds guaranteeing repayment in euros in one way or another have gone on sale since JP Morgan, which invented the concept, brought the first issue to market on 13 January, managing a Fr5bn 5.5 per cent bond repayable in 2004 for Austria.
The EIB, one of the bond market's most active supporters of the euro, has even sold a sterling bond that guarantees payment in euros in the unlikely event that Britain joins a common European currency.
Some of the bond market's biggest, classiest borrowers, including Austria, the European Investment Bank and Italy, have sold bonds that will automatically make interest and principal payments in euros, if that's Europe's currency after 1999.
Philippe Kogler, of Creditanstalt-Bankverein in Vienna, who is involved in selling some of these bonds to clients, says: "Everyone is trying to buy euro-denominated bonds because they are sexy."
Question is, are they the kind of sexy you fall in love with and abandon your mates for, or are they more like a one-night stand who you hope loses your phone number?
The appeal for the borrowers is clear. They're positioning themselves to take advantage of the transition period, which the Maastricht Treaty on EMU gives financial markets to shift payments into the new currency.
While debt denominated in a currency being junked in favour of the euro has to be redenominated by 2001, there'll be a three-year period when national currencies exist alongside their new replacement.
And although some borrowers, such as France, have said they'll switch to paying in euros from day one, others may continue making payments in the old national currencies during the three-year grace period. The new bonds, which come in a couple of different flavours, are aimed at bond buyers who want the assurance that they'll start getting paid in euros immediately.
Some lower-grade borrowers are getting in on the act. Earlier this month, Creditanstalt managed the sale of Asch1bn (pounds 50m) in seven-year eurobonds for Argentina which will make payments in euros from 1999. Mr Kogler at Creditanstalt said the buyers for that issue were retail investors in Europe.
More bonds are on the way. Spain has said it plans to sell 1.5bn ecu of 10-year bonds in the coming weeks, which will automatically pay interest in euros after 1999.
This week, Brazil plans to raise the equivalent of $570m by selling five- year bonds denominated in three different European currencies. It, too, is flirting with the sassy new euro.
Brazilian officials, who recently went on a roadshow to pitch their new issue to investors in Europe, said their long-standing love affair with the US dollar, the currency of choice for most emerging market borrowers, is under review.
The kind of bonds Brazil plans to sell are known as "parallel" bonds, because they have common maturity and interest dates, and will merge into a single bond, denominated in euros, if Europe adopts the common currency.
Not everyone is seduced by the euro's charms. Some bankers aren't convinced the new structures are anything more than a marketing ploy to shift bonds.
"To start with, it was an interesting concept, and now all these guys have jumped on the bandwagon," said Suki Mann, head of European credit research at Commerzbank. "The question is, does it matter for investors? I think it's a bit of a novelty thing."
Even during the three-year transition from the euro being introduced, foreign exchange rates between the old national currencies of countries moving to full monetary union and the euro will be fixed, so it doesn't affect the return on a bond if it pays out in euros, French francs, Austrian schillings or whatever.
Mark Cutis, Treasurer at the European Bank for Reconstruction and Development, says he's not dallying with the euro, and he's not buying these new bonds.
"If EMU happens and all these currencies coalesce into the euro, what difference does it make if you have a German mark bond that instantly becomes a euro, or a German mark bond that says it will," Mr Cutis says.
Problem is, now that the bandwagon is rolling, more and more borrowers are likely to be tempted into touting their new issues as being denominated in euros. And that means more and more investors will be buying securities in a currency that doesn't exist.
Anyone make me an offer for a Ferengi gold-pressed platinum bond? Copyright: IOS & Bloomberg
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