Eurobond

Eurobond: Legal Definition and Fundamentals

The term Eurobond refers to a specific form of bond aimed at meeting the international financing needs of governments, companies, or public institutions. A key characteristic of Eurobonds is that they are issued and traded in a currency different from that of the issuing country. The term “Eurobond” does not necessarily refer to the European currency, but originates from the historic context of issuing bonds in Europe outside national legal systems and in foreign currencies.

Eurobonds play a significant role in cross-border capital raising and are subject to complex legal frameworks involving both international standards and national regulations.

Corporate and Institutional Fundamentals

Issuer Structure

Eurobonds can be issued by various entities, including national governments, supranational institutions (e.g., the European Investment Bank), corporations, or special purpose vehicles. Each issuance is organized by a consortium of banks that structures, places, and ensures compliance with the legal requirements for the issue.

Issuance Markets and Clearing

The issuance of Eurobonds typically takes place outside the issuer’s jurisdiction. Major issuance centers include Luxembourg, London, and Dublin. For settlement and custody, central securities depositories such as Euroclear or Clearstream are commonly used, each subject to specific legal regulations.

Legal Framework for Eurobonds

Contractual Structure

The legal nature of a Eurobond is largely determined by the contractual documents connected with its issuance, particularly the bond terms and conditions. These specifically address the following legal aspects:

• Interest rate and term
• Currency and maturity
• Rights and obligations of creditors and the issuer
• Seniority compared to other liabilities
• Termination rights and covenants (e.g., negative covenants, cross-default clauses)
• Procedures in the event of default or insolvency

The choice of law (governing law)—for example, English, Luxembourg, or German law—is usually expressly agreed upon and significantly influences the interpretation and enforceability of the bond terms.

Prospectus Law and Disclosure Requirements

When placing Eurobonds, specific prospectus and transparency rules must be observed, which may arise from EU law (in particular, the EU Prospectus Regulation) or comparable third-country regulations. These include:

• Preparation of a securities prospectus with comprehensive information about the issuer and the security
• Obligation to publish and have the prospectus approved by the competent supervisory authority
• Ongoing reporting obligations regarding material events during the term of the bond

The prospectus requirement may be waived or restricted under certain regulatory conditions, particularly for private placements to qualified investors.

Investor Protection and Bondholder Rights

Eurobonds are subject to investor protection under the respective applicable capital market regulations. Mechanisms to safeguard bondholder interests are regularly found in the bond terms, for example through:

• The appointment of a trustee or bondholder representative to exercise the collective rights of the bondholders
• Rules for conducting bondholder meetings and majority decisions
• Disclosure and reporting obligations by the issuer

In the event of restructurings, payment default, or insolvency, additional national insolvency provisions apply alongside the contractual rules, which may differ significantly depending on the choice of law and the domicile of the issuer.

Tax Aspects

Withholding Tax and Double Taxation Agreements

The tax treatment of Eurobonds opens up a significant field for investors and issuers, particularly with regard to the withholding taxation of interest payments. Many Eurobonds are structured to meet the requirements of international capital flows and relevant double taxation agreements (DTA), in order to avoid double taxation and minimize withholding taxes.

Tax Transparency and Reporting Obligations

On the EU level and beyond, reporting obligations exist – for example, under the EU Directive on Administrative Cooperation (DAC6) and the Common Reporting Standard (CRS). Issuers and custodians are often required to report tax-relevant information to tax authorities.

Types and Variants

Traditional Eurobonds and Special Forms

Different forms of Eurobonds can be distinguished:

• Straight Bonds (traditional fixed-rate bonds)
• Floating Rate Notes (variable interest Eurobonds)
• Zero Coupon Bonds (Eurobonds without ongoing interest payment)
• Convertible Bonds (convertible bonds)
• Dual Currency Bonds (bonds with currency options)

Each form brings with it specific legal and tax requirements.

State-Related Eurobonds (“Eurobonds” in the narrower sense)

The term “Eurobond” is also used in political and media discourse for a hypothetical jointly issued bond by the Eurozone states (joint bond). This form is the subject of intense legal and political discussion within the European Union, since it would have far-reaching effects on debt liability and the budgetary rights of the member states.

International and Supranational Legal Aspects

Extraterritoriality and Cross-Border Enforcement

The international structure of typical Eurobonds requires the coordinated application of various national laws (conflict of laws). The following legal issues are frequently relevant:

• Jurisdiction and choice of forum
• Recognition and enforcement of foreign judgments
• Conducting bondholder meetings across national borders

Role of International Regulatory Frameworks

Regulatory frameworks such as the UNIDROIT Principles, the Geneva Convention on Bills of Exchange and Cheques, or the rules of the International Capital Market Association (ICMA) influence industry standards and supplement domestic regulations.

Conclusion

From a legal perspective, the Eurobond is a multifaceted financial instrument subject to a multitude of national, European, and international regulations. Its structuring and execution require careful consideration of securities, insolvency, tax, and corporate law, as well as the relevant transparency rules. The legal structure, the choice of applicable law, prospectus law requirements, and the protection of bondholder interests are decisive parameters. The future of Eurobonds, particularly regarding joint European bonds, remains a matter of ongoing legal and political debate.

Frequently Asked Questions

Who is responsible under German law for the prospectus requirement when issuing Eurobonds?

The prospectus requirement for the issuance of Eurobonds in Germany is governed by the Securities Prospectus Act (WpPG) and EU regulations, especially Regulation (EU) 2017/1129. As a rule, the issuer of the Eurobond is responsible for preparing, obtaining approval, and publishing a prospectus unless specific exemptions apply. The responsibility may also lie with the syndicate, especially in syndicate financings, if it is involved in placing the securities in its own name. The German Federal Financial Supervisory Authority (BaFin) reviews compliance with the prospectus requirements if the public offering of securities is intended wholly or partly in Germany, or if the Eurobond is to be admitted to trading on a regulated German market. In cross-border cases within the European Economic Area (EEA), the so-called notification procedure applies, so that the approval of another EEA state, if available, may be recognized.

Are there special corporate law requirements to be observed when issuing Eurobonds?

Yes, from a corporate law perspective, various requirements arise when issuing Eurobonds. Firstly, the company wishing to issue Eurobonds must be authorized to issue bonds under its articles of association. In Germany, stock corporations (AG) and partnerships limited by shares (KGaA) generally require either a general meeting authorization or a corresponding rule in the articles of association according to Section 221 AktG. For limited liability companies (GmbH), a shareholder resolution is usually required. Furthermore, when drafting the bond terms and conditions, compliance with mandatory national law must be ensured, e.g., regarding bondholder rights and possible subordination of the bond in the event of insolvency. For cross-border issuance, conflict-of-laws norms of international private law and, where applicable, requirements of other affected legal systems must be observed.

What legal requirements apply to the bond agreement (bond terms) of a Eurobond?

The bond contract or bond terms (also called issue conditions) are the central legal document for Eurobonds and are subject to complex requirements. These terms govern all rights and obligations between the issuer and bondholders in detail, including maturity, interest, repayment modalities, collateral, covenants, as well as any termination rights or restructuring clauses (collective action clauses, CACs). The terms must not only comply with the regulatory requirements of the issuing state, but also with the relevant exchange rules if a stock exchange listing is sought. The choice of governing law and jurisdiction clause is particularly significant for Eurobonds, as these often lie outside the issuer’s home state. Invalid or ambiguous clauses may lead to the contestability of the bond terms, liability cases, and in the worst case, the invalidity of individual provisions.

How is the taxation of interest income from Eurobonds regulated under German law?

The taxation of interest from Eurobonds is governed by a multitude of national and international regulations. Under German law, interest income from Eurobonds is generally subject to withholding tax (Section 43(1) No. 7 EStG), as well as the solidarity surcharge and, if applicable, church tax, when the recipient is fully taxable in Germany. An exception often applies to interest paid to foreign creditors; in such cases, the so-called “gross-up” clause in international bonds may apply, which obliges the issuer to compensate the creditor for any tax deductions. It must also be examined whether and to what extent double taxation agreements apply, which provide for reductions or exemptions of withholding tax for foreign creditors. Further tax registration obligations may exist for the issuer or intermediary. For Eurobonds issued on the international capital market, it is also regularly necessary to determine in which country the interest income becomes taxable.

What particular requirements exist regarding insolvency law for Eurobonds?

In the event of the issuer’s insolvency, the law applicable to the bond terms and the insolvency proceedings is of particular importance. Under German insolvency law, Eurobonds are treated as claims to be considered in the insolvency proceedings according to Section 38 InsO. The priority of these claims can be modified by contractual agreements, such as a qualified subordination clause. In case of cross-border issuance, it must be noted that the opening of insolvency proceedings is generally governed by the jurisdiction of the state in which the issuer has its ‘centre of main interests’ (COMI). Furthermore, the bond terms may contain collective action clauses (CACs), which enable a qualified majority of bondholders to take restructuring decisions that are then binding on all other creditors. For international cases, rules of the European Insolvency Regulation or other international insolvency standards may also apply.

Are the placement and distribution of Eurobonds in Germany subject to specific regulatory restrictions?

Yes, the placement and distribution of Eurobonds in Germany are subject to a variety of regulatory requirements. In addition to the prospectus requirements already mentioned (WpPG and Prospectus Regulation), in particular the provisions of the Securities Trading Act (WpHG), the Capital Investment Code (KAGB), and the Banking Act (KWG) must be observed. These rules govern, among other things, the eligibility of distribution to certain investor groups (e.g., retail investors or professional clients), requirements for disclosure of key information (transparency obligations), and reporting and notification requirements for certain market participants. Moreover, issuers and placement banks may have to comply with anti-money laundering requirements. In cross-border placements, the national distribution rules of other supervisory states must also be observed, and notifications under MiFID II or AIFMD may be required.

What legal aspects need to be considered for subsequent amendments to bond terms (bondholder meetings)?

Subsequent amendments to bond terms for Eurobonds are a complex process regulated, among other things, by the German Act on Debt Securities (SchVG), if applicable. Changes can generally only be made by third parties (such as the joint representative of the bondholders) or by resolution of the bondholders’ meeting. The convening of such meetings, the requirements for a quorum, and the necessary majorities are regulated by law or in the bond terms. The required majorities may vary depending on the significance of the proposed amendments (simple majority, qualified majority, unanimity). If changes are implemented without the required consent, they are legally invalid and may result in challenges or claims for damages. In internationally structured Eurobonds, it must also be considered which national law applies to the bond terms and which procedure must be followed for amendments in the relevant jurisdiction.