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ANALYSIS

US firms rush to euro debt markets, driven by rock-bottom rates

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 (ECB) 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 euros (S$140 billion), Dealogic data shows. That accounted for 27 per cent of a total 346 billion euros 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 US companies which are now the largest source of corporate bond sales in Europe, according to BofA.

And if the boom extends into 2020, the US would become the largest country in the ICE-BofA eurozone corporate debt index, overtaking France, the bank says.

The rush is driven primarily by rock-bottom borrowing costs in the eurozone, where interest rates are at minus 0.5 per cent and the average yield on corporate euro-denominated bonds has fallen to 0.48 per cent - down from 1.25 per cent 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.

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.

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 eurozone's central bank, which resumed buying bonds in October, holds 183 billion euros 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 eurozone 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 eurozone equivalents that are eligible for ECB purchase, research company CreditSights calculates.

BofA's Mr Martin reckons US names could lure giant Asian life insurers to invest in euro debt. These investors hold over 10 per cent of the US credit market, International Monetary Fund data shows, but they are less familiar with eurozone companies.

"If many of the US issuers come in euro format, it's easier for (insurers) to buy euro investment-grade," Mr 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.

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 per cent by November 2020, from the current 18 per cent.

But the greater presence of American companies could create additional risk, warns Rachid Semaoune, a credit fund manager at Royal London Asset Management, because US corporate behaviour differs from that of European peers.

Commerzbank estimates that US firms had a free cash flow level of around minus US$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 US 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," Mr Semaoune said. REUTERS