International Bonds: Definition, Types, and Examples in Indonesia

Did you know that both the government and private companies do not only rely on domestic funding but also seek investors from various countries? Interestingly, foreign investors can not only purchase shares in Indonesian companies but can also invest funds in bonds issued by the government and private companies in the international market. This instrument is known as global bonds.

Indonesia is among the countries actively utilising the international bond market. The government has previously issued several types of international bonds, such as Samurai Bonds, Dim and Dim Sum Bonds, Kangaroo Bonds, and most recently, Panda Bonds. But what exactly are international bonds? Why do these bonds have unique names like “Samurai” or “Kangaroo”? The following is a complete explanation.

What are International Bonds?

According to Securities Mastery, international bonds are bonds issued outside a single country’s jurisdiction, encompassing both foreign bonds and eurobonds. The term ‘international bonds’ has a broad scope and is used to refer to both foreign bonds and eurobonds.

There are three types of international bonds frequently issued by various countries: foreign bonds, eurobonds, and global bonds. These types are categorised based on the issuing country, the investor’s country, and the currency used (CFI).

In international practice, international bonds are issued using foreign currencies, listed on the stock exchange of the target country, and sold to foreign investors. By issuing international bonds, issuers—whether governments or private companies—are able to attract funds from a wide range of investors and reduce borrowing costs.

According to Money Land, international bonds are regulated by the laws applicable in the host country, which attracts interest from investors within that country. For example, eurobonds might be issued in Singapore but denominated in US Dollars (USD). This allows investors to invest in US Dollars without the risk of currency exchange rate fluctuations, as they are governed by Singaporean law.

1. Foreign Bonds

Foreign bonds are debt securities issued in a domestic market by a foreign entity using the local currency of that market. Through this type of international bond, issuers can access capital from investors in specific countries.

Indonesia has been active in marketing foreign bonds such as Samurai Bonds, Dim Sum Bonds, Panda Bonds, and Kangaroo Bonds. These instruments fall into the category of foreign bonds issued in specific national markets using their respective local currencies.

There are several reasons why private companies and governments issue foreign bonds:

• Access to Capital from Various Markets: Issuing foreign bonds allows private companies and governments to obtain capital from investors in other countries, particularly in markets they have not previously reached. This presents a significant opportunity for developing nation entities to secure funding from larger and more stable financial sources.

• Diversification of the Investor Base: Similar to the previous point, by issuing foreign bonds, companies or governments can reach more investors across various countries, ensuring they do not rely solely on domestic investors. From the perspective of private companies and governments, this is advantageous as funding sources become more stable and have the potential to lower debt costs.

• Hedging Against Currency Risk: Issuers can reduce the risk of exchange rate fluctuations by issuing bonds in the same currency as their income or payment requirements. This ensures that the impact of losses due to exchange rate volatility remains controlled.

2. Eurobonds

According to Securities Mastery, eurobonds are international bonds issued in a currency that is not the native currency of the country where the bond is issued. In short, the currency of these bonds is “foreign” to the country of issuance. For example, an Indonesian company might issue bonds in Singapore using US Dollars (USD), even though the official currency of Singapore is the Singapore Dollar (SGD). This is why they are called eurobonds—because the currency used is “foreign” to the country where the bond is issued.

Despite the name “Euro,” these bonds are not limited to the Euro currency from the European Central Bank (ECB). In the same way that some stocks are classified as bearer shares, eurobonds are considered bearer bonds. This means the bondholder is treated as the owner, which increases anonymity but also facilitates easier transfers.

Historically, eurobonds were anonymous. According to Science Direct, “Eurobonds are bearer bonds because they are not registered centrally in one location.” This meant ownership was determined by whoever held the certificate. While eurobonds were once known for high levels of secrecy and were popular in international offshore markets, this has changed. Most modern eurobonds are recorded electronically with custodian institutions, meaning the identity of the investor is known to the system.

Characteristics of eurobonds include:

• International Issuance and Trading: Eurobonds are designed for the international market, allowing both private companies and governments to reach a global investor base. They are usually listed on the exchange of the country where they are traded.

• Lighter Regulation: [Article ends here]