What is this Eurobond business?

Last week there was a lot of excitement among fellow Rwandans when it was announced that Rwanda had raised $ 400 million in its Eurobond, which was oversubscribed to a tune of about 3.5 billion US dollars.I received several phone calls from friends who were excited but it was soon apparent that whereas they understood that it was good news for Rwanda, they didn’t understand much else.The bond, being the first of its kind in the East African region, it is understandable that many people would seek explanations of what is it or why is it!Let me start by explaining the term bond. If a company needs money instead of asking its shareholders to contribute more to the business (Equity finance), or get a bank loan, it could choose to borrow from the public by issuing bonds.Essentially it would give interested people in the public a piece of paper in exchange for cash that entitles them to interest and their principal at a later date –this piece of paper is the bond. As far as I know, companies in Rwanda have not started to raise this type of finance on the Rwandan Stock Exchange. A government can also raise finance from the public in a similar way and it would issue a Treasury bond.Treasury bills (T-bills) are marketable securities (papers) that a government sells in order raise money. When you buy one of these papers, you are lending your money to the government.Treasury bills are short-term obligations issued with a term of one year or less and they are sold at a discount from face value, they do not pay interest before maturity. For example, a Rwf120,000 Treasury bill (face value) could be sold at Rwf100,000 (discount); on maturity you would give the ‘paper’ back to government and they would pay you Rwf 120,000 and you would make a profit of Rwf 20,000. In Rwanda, weekly treasury bills are issued with maturity dates of 28 days, 91 days, 182 days and 364 days.Treasury bonds, on the other hand, are securities (papers) that have a stated interest rate that is paid usually semi-annually until maturity. Bonds are issued usually in terms of ten years or more, they are therefore long term investments.It is important to note that treasury bills and bonds are considered to be risk free investments as people assume that governments are very unlikely to dishonor their payment obligations.Treasury bills and bonds are issued by a central bank and are traded in the economy under the issuing banks jurisdictionWhat are the Eurobonds? Eurobonds are bonds issued/traded in a country using a currency other than the one in which the bond is operating. This means that the bond uses a certain currency, but operates outside the jurisdiction of the central bank that issues that currency. This means that had Rwanda, for example, issued Rwandan francs bonds on the Dar es Salaam Stock Exchange (DSE) it would still be a Eurobond – not ‘Afribond’. It is, therefore, important to note that the term Eurobond has nothing to do with Euro.It was reported that the Rwanda debut $400 million Eurobond was oversubscribed by $3.5 billion. What message does this send home? It means that investors had a strong appetite to buy the Rwandan Eurobond due to a couple of reasonsFirstly, the amount asked for was considered to be modest and, therefore, the risk associated with repaying the loan is low; this, coupled with a good return, makes good sense for an investor. So if we were to immediately issue another Eurobond tomorrow we may not get so many interested investors as our risk to default would increase. So what now?Investors believe that Rwanda is doing well and will continue to do well in the future – at least for the next 10 years.For the more savvy investors, a Eurobond from a country like Rwanda brings diversification to one’s portfolio.Investors also look at what the money is going to be used for, if it is for developmental projects it is a signal that the government has faith in the future; why not be part of that future investors may ask.The bottom line for the oversubscription is that the investors look at Rwanda’s strong economic growth, low debt and political stability.Since we have gotten the credit, we need to repay our obligations as per the agreement with our financiers (the Eurobond holders); if this is done our credit rating will improve and it will be easy to borrow once again in the future.Where will the government get the money to repay the ‘loan’? Through taxes, of course – don’t get gloomy my friend. A thriving economy means you make more money, pay more taxes but remain with more balance to hopefully save before you indulge…The writer is a Certified Public Accountant based in Kigali.

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What is this Eurobond business?