Types of Foreign Bonds

Yankee Bonds

Yankee Bonds are US dollar denominated issues by foreign borrowers (usually foreign governments or entities, supranationals and highly rated corporate borrowers) in the US bond markets. Yankee bond has certain peculiar features associated with the US domestic market. SEC regulates the international bond issues and requires complete disclosure documents in detail than the prospectus used in Eurobond issues. Foreign borrower will have to adopt the US accounting practices and the US credit rating agencies will have to provide rating for these bonds. These bonds are sponsored by a US domestic underwriting syndicate and require SEBI (Securities and Exchange Board of India) registration prior to selling them in the domestic US market. Reliance Industries Ltd. has been the most successful corporate to tap this instrument with a 50-year, $50 million Yankee Bond issue.

Types of foreign bonds

Samurai Bonds

These are bonds issued by non-Japanese borrowers in the domestic Japanese markets. Borrowers are supranationals and have at least a minimum investment grade rating (A rated). The maturities range between 3-20 years. The priority for allowing issuance of Samurai bonds is given to the sovereigns after the supranationals and their entities and to high quality private corporations specifically if there are Japanese trade links. This is also a registered bond and the settlement and administrative procedures make it relatively costly. Among the Yen financing instruments, this instrument is the most expensive in terms of issuing costs. As this instrument is issued for the public, the arrangements for underwriting and selling have to be made which involves large documentation. There are two major parties to a Samurai bond issue, the securities house, which acts as lead arranger, and the bank, acting as a chief commissioned company. The process followed is generally the same as is followed elsewhere for the Eurobonds. However, it is to be noted that the documentation and formalities are friendly and hospitable.

Bulldog Bonds

These are sterling denominated foreign bonds which are raised in the UK domestic securities market. The maturity of these bonds will be either for very short periods (5 years) or for very long maturities (25 years and above). Bonds with intermediate maturity periods are rare. These bulldog bonds are generally subscribed by long-term institutional investors like pension funds and life insurance companies. These bonds are generally redeemed on bullet basis (one time lump sum payment on maturity), however, due to the long maturities, early amortizations, say 5 equal annual installments prior to the maturity date, may also be allowed. A margin on the UK government bond will be the yield earned on this paper. These bonds which are offered either by placing or offer for sale process, will have to be listed on the London Stock Exchange.

Shibosai Bonds

These are the privately placed bonds issued in the Japanese markets. The qualifying criteria is less stringent as compared to Samurai or Euro Yen bonds. Shibosai bonds are offered to a different market segment that consists of institutional investors, including banks. The eligibility criteria, amount, maturity and redemption as well as coupon rate and issue price are all governed by Japan’s Ministry of Finance (MoF) guidelines. In terms of eligibility, MoF has classified various borrowers (sovereign and corporate) into different groups. The rated borrowers are divided into three groups in accordance with the rating, while non-rated borrowers are segmented on the basis of country rating or previous bond issue floatation experience. The pricing formula is elaborate and starts with the computation of base rate, spreads being added according to the credit rating of the borrowers. The procedures for completing bond issue formalities are elaborate and take about forty-five days after the mandate is awarded.

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