From Harley-Davidson to Colgate-Palmolive, US firms are flocking to borrow in euros.

Rock-bottom rates attract companies

LONDON: From Harley-Davidson to Colgate-Palmolive, US 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 US 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 US firms has quadrupled this year from 2018 levels, to around €93 billion ($103 billion), Dealogic data show.

That accounted for 27% of a total €346 billion ($383 billion) of eurodenominated 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 US companies which are now the largest source of corporate bond sales in Europe, according to the Bank of America Corp.

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 rockbottom borrowing costs in the euro zone, where interest rates are at -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 US 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 Chase & Co.

Mergers and acquisitions are another factor — fintech Fidelity National Information Services, for example, raised €5 billion back in May as part of a multicurrency deal to finance its purchase of card payment firm Worldpay.

The reverse Yankee boom is welcome news for European bond buyers dismayed at the yield collapse triggered by the ECB’s asset purchase programme.

The euro zone’s central bank, which resumed buying bonds in October, holds €183 billion of corporate debt. Towards 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 Credit Sights calculates.

BofA’s Martin reckons US names could lure giant Asian life insurers to invest in euro debt. These investors hold over 10% of the US credit market, International Monetary Fund data show, but they are less familiar with euro zone companies.

“If many of the US 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.”

With the ECB expected to stick with stimulus and the US Federal Reserve not cutting rates for now, analysts predict reverse Yankee issuance will exceed 2019 levels next year.