The name’s Bond. Eurobond.
US companies are the largest borrower in the European corporate debt market.
From Harley Davidson to Colgate-Palmolive, American companies are looking to lend in euros. Record issue breathes new life into the Eurobond market.
Raising funds by American companies, called «reverse yankee» by analogy with Yankee bonds, which are placed by foreign companies in the United States, has become the new reality of the debt market denominated in euros. Euro-denominated US placements rose to around 93 billion euros ($ 103 billion), Dealogic data show.
This represented 27% of the total euro denominated investment grade corporate bond issue of € 346 billion ($ 383 billion).
From pharmaceuticals to consumer goods and fintech technology, according to BofA (Bank of America), Europe has become a popular market for US companies, which are currently the largest corporate borrower in the eurozone. And if the boom lasts until 2020, the United States will become the largest country in the Eurozone’s ICE-BofA corporate debt index, overtaking France..
The peak was caused, first of all, by extremely low borrowing costs in the eurozone, where interest rates are at minus 0.5%, and the average yield of corporate bonds in euros fell to 0.48% – from 1.25% at the beginning of 2019.
European credit markets offer «the best financing conditions for global issuers, – said the head of the BofA lending strategy Barnaby Martin. – This cannot be found anywhere else».
The euro placement allows US borrowers to replace debt with a higher coupon and shorter maturity with a euro debt with a longer coupon period. This lowers funding costs and improves the performance of companies with euro-denominated assets, says Marc Benier, JPMorgan’s head of investment finance for Western Europe..
Reverse Yankee Bond Boom Is A Long-Needed Opportunity For European Bond Buyers Alarmed By Falling Yields Caused By ECB Asset Buyout Program.
The eurozone central bank, which resumed buying bonds in October, has corporate debt of € 183 billion. By the end of the quantitative easing program, according to various estimates, it accounted for a fifth of the corporate debt obligations assumed.
Since Yankee reverse bonds usually cannot be bought by the ECB, they often bring higher yields. They accounted for a significant portion of the longer-term debt obligations this year, including half of the 30-year corporate bonds sold, according to Refinitiv..
These longer, higher-yield issues are especially popular with investors..
Companies like Amazon and Visa, which have significant revenues in euros but have no debt in euros, could change the market, says BofA.
The expanded presence of US companies could create additional risk, warns Rashid Semaun, loan fund manager at Royal London Asset Management, because US corporate governance is different from European peers..
Commerzbank estimates that free cash flow in the US was around minus $ 300 billion in 2018. This is a visual indicator of how much money a company will have after capital expenditures in order to pay investors the yield on bonds and stocks..
The rate in Europe balances around zero.
«This is troubling because American corporations are much more aggressive in their financial policies. In terms of shareholder returns, the pressure comes either in the form of share buybacks or special dividend payments that hurt bondholders», – notes Semaun.