Standing at the intersection of the Eurobond and high yield markets, so-called "Cross-Over" emerging market deals were more popular than ever in 2021. These deals were not necessarily like the deals that had come before—deals often included different features of Eurobonds or high yield bonds (most notably, the move to senior secured structures, which had not been seen in any significant way before) to make these bonds more marketable to investors. The White & Case Capital Markets team looks at how the market has developed and the tools that might be available to issuers in the future.

Emerging Markets Bonds—A History

In any capital market financing, the key challenge to a successful transaction is to strike the right balance between supporting the issuer's need for ongoing flexibility to run and grow its business and providing investors with sufficient protections to preserve their investments.

Eurobonds have since the 1950s been the mainstay of capital markets outside of the United States and were largely issued by investment grade companies with few or no covenants. Emerging market deals in particular started to take off in the late 1990s across the Commonwealth of Independent States. As a result of structuring restrictions, such as the requirements for licenses to issue securities and/or requirements to publish prospectuses in local languages, for example, these deals were largely drafted as loan participation notes rather than direct issues of securities. These deals contained limited financial reporting covenants and this, in combination with the holding structures of corporate groups, amongst other factors, resulted in these bonds containing loan style covenants rather than bond style covenants. Early emerging market bond covenants were therefore structured as negative covenants prohibiting certain actions by the issuer or the issuer's corporate group. These negative covenants mostly prohibited asset sales and mergers and the deals included very limited financial covenants, if any.

As the number of emerging market bond issuances increased, different styles evolved depending on the issuer's corporate structure, jurisdiction and local law requirements. For example, in Russia and Ukraine, issuances were loan-based and in markets like Kazakhstan and Turkey, these issuances were securities-based.

Emerging market bonds were also only either issued by sovereigns or financial institutions; however, as the bond market began to open up to corporates, the notion of a cross-over bond began to emerge and develop.

Eurobonds vs High Yield Bonds—The Choice

The choice between Eurobonds and high yield bonds derived in part from the historical development of each product as well as the profile of the issuer. Generally:

  • Eurobonds typically assume a strong credit rating or risk profile (i.e., are comparable to investment-grade debt securities in the United States) or a sovereign or sovereign-linked credit support. They have developed outside the constraints of the US securities market and thus provide more flexibility in a number of aspects over more US-centric models.
  • High yield bonds have been widely included as part of the capital structure in the United States since the early 1980s, but only gained significant traction as an international mainstream source of funding following the 2008 financial crisis. Due to investor familiarity with the high yield product, as well as the more thoroughly New York court-tested nature of the covenants, New York law has continued to be the primary governing law of international high yield bonds.

Some distinctions between Eurobonds and high yield bonds:

  • Eurobonds in emerging markets are typically issued by sovereigns, sovereign-owned enterprises or entities that are strongly linked to the economy of a particular country, such as issuers from the banking sector (even if they are below investment grade), while high yield bonds are by definition bonds by issuers that are below investment grade.
  • Sovereign ratings, which often form a ceiling for corporate or other non-sovereign issuer ratings in the relevant jurisdiction, are often lower in emerging market jurisdictions than in more developed markets. This can present a challenge for corporate entities when compared to similarly performing companies in more established jurisdictions.
  • Traditional investor bases for Eurobonds and high yield bonds were different, although in recent times we have seen more traditional high yield investors investing in Eurobonds and vice versa, creating, for certain credits, industries or jurisdictions, a more limited (or zero) distinction between present investor bases. Eurobonds are increasingly being structured to broaden the possible investor base.
  • The governing law for Eurobonds is typically English law whilst the governing law for high yield bonds is typically New York law. This choice of governing law is increasingly less influenced by the target investor base (due to the convergence of traditional investor bases) but rather by the jurisdiction of the issuer and the parties involved on the deal. Both Eurobonds and high yield bonds are sold on either a Regulation S-only or Regulation S/Rule 144A basis with most deals being sold on the basis of the latter as it is considered more marketable to investors where Eurobonds and high yield deals are prepared to a Rule 144A standard.

While all transactions have unique features, the following outlines some of the historical structural differences between international Eurobonds and high yield bonds.

The Emergence of the True "Cross-over" Deal

The year 2021 signalled a shift in EM/HY "cross-over" transactions, with a real willingness on the part of market participants to pick and choose from a menu of potential options/structural enhancements in order to increase the marketability of the transaction.

Below is a chart comparing some of the key covenant structures in EM/HY "cross-over" credits in five jurisdictions/geographical areas since 2021 (Nigeria, Eastern Africa, South Africa, Turkey and the Middle East).


Key Considerations when Structuring a "Cross-over" Deal

Whether structuring either a traditional high yield or a cross-over deal from a covenant perspective, care must be taken by all parties to ensure that they work from the issuer's perspective and will not result in a consent solicitation/noteholder meeting process to amend the covenants for actions or corporate activities that could have been reasonably contemplated prior to the marketing of the transaction.

Some of these considerations are as follows:

  • Other debt in the capital structure—is that properly allowed for, including its required place in the capital structure? In certain jurisdictions, traditional forms of bank debt may still be key sources of financing for the issuer and such bank lenders may not be comfortable being pari passu with bondholders.
  • The jurisdiction—particularly for secured deals, there may be significant timing constraints in providing security and a generous post-closing period may be sensible and/or warranted.
  • Public companies—one of the key covenants in a high yield covenant package is the "restricted payments" covenant, which restricts distributions to shareholders, amongst other things, and this may be particularly hard to deal with if the issuer is a public company. Public companies want, and need, flexibility here to issue a regular dividend.
  • Some covenants may simply be inappropriate for the structure—for example, the typical "dividend blocker" covenant (ensuring that subsidiaries do not have restrictions on their ability to upstream cash to the issuer to repay the bonds) is probably not workable in a sukuk structure.

In our experience, while it might not be appropriate for emerging market issuers to have a high yield approach to covenant flexibility, to the extent that there are learnings or common points that are accepted in the traditional high yield market, it may make sense to give emerging market issuers the benefit of that flexibility. It serves virtually no one to insist that emerging market issuers be stuck with a set of high yield covenants from the 1990s while the rest of the market has moved on to ensure no trip wires are left in the covenant package which have been corrected or developed over time.


Cross-over structures offer issuers the required flexibility to run and grow their business whilst providing investors with the protections to preserve their investments. With the increasing sophistication of emerging market issuers and deal structures as well as the increasing adoption and acceptance of these cross-over structures, we can expect to see more cross-over deals in the coming years.