'Reverse Yankee' market: Diminishing decoupling
US firms are heading towards record levels of euro issuance, bringing the credit markets closer together than ever.
Quantitative easing and negative interest rates in Europe have ultimately created a borrowers’ market, and US companies in particular are playing it.
Sure, Apple selling Swiss franc bonds to take advantage of negative government rates out to 10 years has been notable, but that US corporate issuers are funding in euros is more profound.
Investment-grade and high-yield companies have been leaping at the chance to lock in competitive euro funding, especially at five years and longer.
A stronger dollar and the flattening of the euro curve is why – enabling US dollar borrowers to raise longer euro funding at a cost generally lower than they could in their home currency.
Long-dated euro bond sales by companies such as Mondelez, Tyco International, Priceline, TE Connectivity, AT&T and Flowserve in recent weeks underscore this.
Euromoney’s sister publication Global Capital summed it up perfectly in the final week of February with the headline: ‘Oversized, oversubscribed and over here: US firms take over the euro market’.
In what some bankers have dubbed the ‘reverse Yankee’ market, the deal that showed the extent of the opportunity for US issuer’s came in the form of Coca-Cola’s €8.5 billion offering, the second biggest euro corporate deal in history.
Expectations are building that total euro corporate issuance this year could be on for a record.
There was just over €50 billion of investment-grade and high-yield bond issuance from US companies last year; Bank of America Merrill Lynch analysts believe that on the current run rate, sales could race to a new high of €100 billion by year-end.
Most of the deals have been from US companies that do not need to swap the proceeds back into dollars. Yields in euros are generally at least 100 basis points lower for highly rated corporates than they are in dollars.
This volume is a welcome development in the short term, satiating European investors’ acute need for yield.
But don’t be fooled into thinking that European disintermediation is driving this volume. In the first two months of the year, less than 20% of euro corporate issuance was from the continent’s borrowers.