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Autostrade top

The basic terms and conditions of what is considered by most to be the first Eurobond issue, or at least of the first of the modern era. Originally designed in part to exploit a tax loophole allowing transactions between foreign counterparties in the UK to escape tax, the $15 million issue was the first in a market that saw over $4.5 Trillion of issuance in 2009, and is on track to match 2012’s issuance total of $4.0 Trillion this year.  The cash raised never got to Autostrade: instead IRI lent the proceeds to FINSIDER, the Italian steel company. It took over six months to iron out all the details of the first issue.

The week before last, on Monday 24th, I was lucky enough to be a guest at a celebration gala dinner held at The Savoy in London. What was being celebrated was the 50th anniversary of the Eurobond market.
To be sure sometime on the 1st July 1963 at the offices of S. G. Warburg & Co in London a subscription agreement was signed for a new issue, and around the 17th July 1963, $15,000,000 face value of bearer bonds issued by Autostrade were made available at the Banque Internationale à Luxembourg. The issuer, Autostrade, was a company owned by the Italian state which built and ran the Italian motorways; and the issue was guaranteed by IRI, described on the advert publicising the issue as “the principal Industrial and Financial Holding Corporation owned by the Italian State”. They paid a coupon of 5 ½% and had a final maturity of 1978 (or 15 years).
The fact that they were bearer bonds and available in Luxembourg became a regular feature of Eurobonds, and speaks volumes. Bearer bonds are anonymous: as their name implies they can be carried about on one’s person. In these days of electronic finance it is difficult to understand that there was a time when investors would actually own physical securities such as stocks and bonds, which they might well keep in their safe at home. On coupon or dividend day, they would dutifully go to the paying agent to collect their income. In the picture published with an earlier post, we see a wide cross-section of the British middle and upper-middle class queuing at the Bank of England to collect the dividend on their Bank of England shares.  In the case of the Autostrade bonds, the same thing would have happened at the Banque Internationale à Luxembourg… but very few in the queue would have actually been local Luxembourgeois: holders would have come from France, Germany and Belgium, and perhaps even further afield. Among them may have been an apocryphal “Belgian dentist” the avatar of the typical retail investor who bought such bonds. Having arrived at the paying agent in Luxembourg, the coupon on the bond would have literally been clipped off (the word “coupon” comes from the French “couper” which means “to cut”)… and exchanged for cash. Bearer bonds therefore were a perfect vehicle for avoiding taxes, which is one of the reasons why the Eurobond market met with such initial success and grew so fast. It is also why almost all securities today are “dematerialised”, i.e. exist only in registered format, which format is almost certainly electronic, and which cannot be hidden anonymously in a safe or under mattress.
The Eurobond market grew fast, and fifty years after the Autostrade issue the Eurobond market may rightly be said to be one of the most important sources of capital anywhere on the globe. The first issue was in US Dollars, but there have since been Eurobond issues denominated in almost every convertible currency on earth. The great and the good gathered in the Savoy had much to be proud about, and were humble enough to say out loud that whilst much good may have stemmed from the development of international capital markets, particularly in the more efficient global deployment of resources, the key motivation for growth and innovation in these markets was hardly altruism. Greed and the profit motive have led us to make mistakes, and occasionally to lose our way, perhaps especially so in the last decade.
One way we have strayed is by giving less and less information to potential investors about the bond we may be asking them to buy. The Autostrade issue’s newspaper announcement (reproduced in full below) gives us more informationAutostrade

about the borrower in one page than many of today’s prospectuses do in 50.  But information may not be enough: Andrew Haldane tells us that a rough calculation indicates that to be fully informed about the underlying assets of a CDO-squared[1], we would have to plough through some 10 MILLION pages of information. And in a market noted for its numerous and sometimes complex innovations, we have certainly shown ourselves too easily capable of abusing intrinsically positive ideas which, used correctly, enhance rather than deteriorate the commonwealth.

But this is probably true about the development of any significant market, be it for capital or otherwise. And I was certainly lucky to stumble upon this particular market at the start of my career, straight after leaving Balliol with a degree in Philosophy and Theology and a literally metaphysical feel for, and training in, speculation.  Little did I know then that I would participate in developing the wild frontier of international finance, and how much I would learn in doing so.  But let us not forget the roots of the market: a mere ten years after that first issue, the first serious study of the Eurobond market[2] speculated on what attracted investors to it.  Of the five reasons why investors were attracted to it, Dr H. C. Donnerstag gave as the top reason “a desire for tax minimisation and even tax evasion”.  Last in the list of five reasons came “genuine investment purposes”.  Greed is never very far away when money is concerned.

But I have to admit that I was happy to be invited to the party.

[1] A CDO-squared is a CDO whose assets are other CDOs. A CDO is a collateralised debt obligation, and is defined in greater detail in the glossary.

[2] Dr H. C. Donnerstag, 1975, The Eurobond Market