By Yoruk Bahceli
LONDON (Reuters) – From Harley Davidson to Colgate-Palmolive, U.S. companies are flocking to borrow in euros and their record issuance is breathing life into a market where yields have been hammered by the European Central Bank’s renewed stimulus push.
Offshore fundraising by U.S. firms — dubbed the “reverse Yankee” in reference to Yankee bonds, which are sold by foreign entities in the United States — has been a regular feature of the euro debt market. But issuance by non-financial, investment-grade U.S. firms has quadrupled this year from 2018 levels, to around 93 billion euros ($103 billion), Dealogic data shows.
That accounted for 27% of a total 346 billion euros ($383 billion) of euro-denominated investment-grade corporate bond issuance, according to the data.
From pharmaceuticals to consumer goods makers to fintech, the reverse Yankee has become the go-to market for U.S. companies which are now the largest source of corporate bond sales in Europe, according to BofA.
And if the boom extends into 2020, the United States would become the largest country in the ICE-BofA euro zone corporate debt index, overtaking France, the bank says.
The rush is driven primarily by rock-bottom borrowing costs in the euro zone, where interest rates are at minus 0.5% and the average yield on corporate euro-denominated bonds has fallen to 0.48% — down from 1.25% at the start of 2019.
European credit markets offer “the best funding conditions for global issuers” said BofA’s head of credit strategy Barnaby Martin. “They’re not going to be able to find that anywhere else.”
Euro issuance allows U.S. borrowers to replace high-coupon, shorter-dated dollar debt with longer, lower-coupon euro debt. That lowers financing costs and improves the results of companies with euro-denominated assets, said Marc Baigneres, head of Western Europe investment-grade finance at JPMorgan.
Mergers and acquisitions are another factor — fintech Fidelity National Information Services, for example, raised 5 billion euros back in May as part of a multi-currency deal to finance its purchase of card payment firm Worldpay.
Graphic: Share of outstanding euro-denominated debt https://fingfx.thomsonreuters.com/gfx/editorcharts/EUROZONE-BONDS-YANKEES/0H001QXRCB1Y/eikon.png
The reverse Yankee boom is welcome news for European bond buyers dismayed at the yield collapse triggered by the ECB’s asset purchase program.
The euro zone’s central bank, which resumed buying bonds in October, holds 183 billion euros of corporate debt. Toward the end of quantitative easing a year ago, it was estimated to hold a fifth of the eligible corporate debt stock.
Because reverse Yankees are not usually eligible for ECB purchases, they often carry higher yields than similarly rated euro zone issues. They also made up a significant chunk of this year’s longer-maturity debt, including half the 30-year corporate bonds sold, according to Refinitiv.
These longer, higher-yield issues are especially popular with investors.
Triple B-rated reverse Yankee bonds of seven to 10 years’ maturity can offer a spread of up to 25 basis points more than euro zone equivalents that are eligible for ECB purchase, research company CreditSights calculates.
BofA’s Martin reckons U.S. names could lure giant Asian life insurers to invest in euro debt. These investors hold over 10% of the U.S. credit market, International Monetary Fund data shows, but they are less familiar with euro zone companies.
“If many of the U.S. issuers come in euro format, it’s easier for (insurers) to buy euro investment-grade,” Martin said. “It will create additional demand and it will be bullish for the market.”
Graphic: Reverse Yankee bond issuance jumps in 2019 https://fingfx.thomsonreuters.com/gfx/editorcharts/EUROZONE-BONDS-YANKEES/0H001QXRDB21/eikon.png
NEXT YEAR IN
With the ECB expected to stick with stimulus and the U.S. Federal Reserve not cutting rates for now, analysts predict reverse Yankee issuance will exceed 2019 levels next year.
Companies such as Amazon and Visa which have significant euro revenues but no euro debt could tap the market, said BofA, which expects reverse Yankees’ share of the index to rise to 20.8% by November 2020, from the current 18%.
But the greater presence of American companies could create additional risk, warns Rachid Semaoune, a credit fund manager at Royal London Asset Management, because U.S. corporate behavior differs from that of European peers.
Commerzbank estimates that U.S. firms had a free cash flow level of around minus $300 billion in 2018 — the ninth straight year of negative flows. That is a measure of how much cash a company will have after capital spending to pay bond and equity investors.
The figure in Europe was around zero.
“It’s a worry because U.S. corporates are a lot more aggressive in their financial policy, and in terms of shareholder returns, either in the form of share buybacks and special dividends, which are detrimental to bondholders,” Semaoune said.
Graphic: Corporate bond yields plunge in 2019 http://fingfx.thomsonreuters.com/gfx/mkt/13/113/113/corporate%20bond%20yield.png
(Reporting by Yoruk Bahceli; Editing by Sujata Rao and Catherine Evans)