Bonds without Borders: A History of the Eurobond Market

CHAPTER 5 Going Global 1985–1989

From the mid-1980s floating rate notes (FRNs) tended to replace bank loans as a major form of borrowing. In 1984 and 1985 FRNs were the fastest growing area of the Eurobond market. They accounted for 55% of issuing activity in the dollar Eurobond market in 1984 and in 1985 the FRN sector accounted for 23% of all borrowing activity in the Eurobond market. The development of the interest rate swap market in the early 1980s clearly contributed to demand. Banks looking to raise floating rate funding, their natural liability, could now access sub-Libor funding through the swap market. Some of these funds found their way into the FRN market where banks could invest and make a clear margin. As banks left the FRN market as issuers, the slack was taken up by increasing sovereign issuance. The FRN market offered a number of benefits over the traditional syndicated loan market and new sovereign issuance replaced maturing syndicated loans.

Inevitably with this massive growth in the FRN sector came a rapid decline in the spreads paid by borrowers. When Sweden launched its first jumbo issue in 1982 the margin over Libor was 45 basis points. Its second jumbo issue in November the same year was priced at 33 basis points over. By early 1984 the effective spread over Libor for Sweden was around 15 basis points. In August 1986 a £1bn FRN offering by the Kingdom of Denmark was issued at a yield of 10 basis points under Libid.

New issue fees were also squeezed, ...