eBusiness Weekly
Alfred M. Mthimkhulu
One of the most intriguing developments in the young discipline of Finance is the rise of the Eurobond market. The first Eurobond issue was a US$15 million, 6-year bond by Finsider, a subsidiary of state-owned Institute for Industrial Reconstruction, Italy. Finsider had to guise itself as a new entity called Autostrade to avoid withholding tax to prospective investors. The Eurobond market itself was a private sector initiative. Some even argue that it was a one-man’s crusade for a European union driven by business than politics. That man was Sir Siegmund Warburg. We met him in an article I shared recently in these pages titled “Good-old merchant banking revisited” wherein he shocked the British establishment with the country’s first hostile takeover.
As my mind was mapping out this article, I was healthily distracted by a news line on Bloomberg TV with “Zambia” in it. It seemed Zambia was trying to reach some understanding with its Eurobond holders. Back in 1963 before modern Zambia was born, the Eurobond market was still an idea Sir Warburg and perhaps a few like-minded had been pushing for.
They were now on the verge of realising it. About half a century later, Zambia, Mozambique and many others in the north and south would flock to the Eurobond market to raise capital for development.
Interestingly, the first deal was a modest US$15 million. It was led by Deutsche Bank and included, of course, Sir Warburg’s bank. To prepare the way, in June 1962, Sir George Bolton, Chairman of Bank of London and South America approached the Governor of the Bank of England.
He told the Governor of “an idea that is currently taking place regarding opening the London market to a wider variety of borrowers of loans denominated in foreign currency”.
The idea was being promoted by bankers such as SG Warburg, Hambros and Barings. Sir Bolton, a former central banker himself, was most suited to lobby the BoE.
In short, the bankers wanted to restore London as a premier international financial centre and deemed this “a matter of immediate interest to the Western World” given that “the only centre that can help New York is London, as we are all uncomfortably aware of the isolation and inefficiency of the European capital markets”. The Governor responded: “We are sympathetic to this proposal and will give it what practical support we can.”
The regulator liked the idea because issuing US$-denominated bonds in London would mop-up US$ deposits. The deposits were hot money, coming and going willy-nilly causing worrisome volatility in the exchange rate.
Recall this was well-after the Second World War. The British pound had long lost its status as the world’s reserve currency. It was the US$ to which all European currencies were pegged with adjustments made in reference to state of trade flows.
Within Europe, it was West Germans’ deutschmark that commanded strength while the pound, franc, lira and the rest devalued perennially. Mopping-up hot US$ deposits and parking them away in bonds for years could thus help stabilise the British pound. More importantly, this could indeed re-establish London as the leading international financial centre.
Realising that the regulator was persuaded, the merchant bankers pressed for bargains. Could the government do something about the high stamp duty and taxes otherwise consideration would be given to Luxembourg or Amsterdam? Not so fast, not yet.
As a result, the first Eurobond was registered in Schiphol Airport in the Netherlands. To avoid UK tax, the coupon was payable in Luxembourg.
The coupon was 5,5 percent and the bond itself came in small denominations and was issued at 98,5 percent of par. During its tenure, holders would receive coupon rate without incurring withholding tax. After that first deal was closed, many followed.
The London Stock Exchange which had initially refused to list the bonds, acquiesced. Something new and global was emerging.
Lionel Fraser of the merchant bank Herbert Wagg summarised it all as follows: “The secret of these issues . . . was that the bonds must be totally anonymous . . . without any questions asked” given that “the ultimate buyers of the bonds were individuals, usually from Eastern Europe but often from Latin America, who wanted to have part of their fortune in mobile form so that if they had to leave they could leave quickly with their bonds in a small suitcase”.
The Economist magazine hailed it as a deal that helped “London to re-establish itself as entrepôt centre in the international capital market”.
By 1964, 44 loans had been issued raising $681 million. More financial innovation followed, for instance the 1971 $100 million sterling-deutschemark issue by Imperial Chemical Industries sponsored by SG Warburg which offered investors a choice between the two currencies. By 1968, $3,5 billion had been raised in the nascent market and an additional $2 billion would be raised four years later.
The secondary market slowly developed enabling investors to cash-out before maturity. Interest from investors was overwhelming to the extent that Sir Warburg proposed a self-regulating mechanism of queueing the bond issues.
As secondary trading expanded, suitable settlement system evolved. Branches of foreign banks in London increased.
The international financial centre had been re-asserted albeit in the shadow of New York and its underlying industrial sector far inferior to West Germany and emerging Japan.
When in 1971 President Nixon terminated the peg of European currencies to the US$ and the US$ to gold, Eurobond market saw more issues denominated in European currencies thus broadening choices for investors with obvious risks in weaker currencies. Twenty-five years later, the Euro was born in part to mitigate that intra-regional currency risk and thus boost capital mobility and trade.
Whatever the views are on the current European Union and the Euro, it is very had to miss the role played by private sector actors if not in nurturing the birth of the Euro then, most certainly, in founding the modern international bond market. The role of the private sector in the renewal of institutions and the birth of new ones to facilitate economic development can never be overemphasised.
Email: [email protected], Twitter: @mthimz
