McDonald’s sold $2.3 billion of euro-denominated bonds last week as U.S companies take advantage of the eurozone’s cheap debt.
Source: The Wall Street Journal
A giant new buyer in the corporate-bond market–the European Central Bank–is set to cement a trend of American companies issuing debt on the continent.
So great may be the flood, some analysts estimate, that it could dampen U.S. bond issuance and provide a lift for U.S. bond prices.
American companies have flocked to Europe’s bond markets in recent times to borrow at rock bottom rates. The ECB plans to start buying corporate bonds in June–likely pulling borrowing costs down even more. Foreign companies can be included in the purchases provided they meet various criteria, including issuing the securities in euros through a local subsidiary.
“The ECB’s program is going to motivate everyone across the globe to come to Europe to issue debt,” said Barnaby Martin, a credit strategist at Bank of America Corp.
Corporate bonds will form part of the ECB’s €80 billion ($92 billion) in monthly asset purchases, which now mainly consist of government bonds. Analysts estimate the ECB could buy up to €5 billion of corporate bonds per month across primary and secondary markets.
That extra demand could encourage more debt issuance, following a record year for corporate borrowing in Europe’s bond markets in 2015.
European companies are moving away from bank lending towards capital markets when borrowing money.
In 2015, European companies borrowed 24.7% of their money (or €1.8 trillion) in bond markets, according to the Association for Financial Markets in Europe, a trade group, with the rest coming from bank lending. That’s up from 18.7% in 2009.
In a recent note, credit strategists at Wells Fargo said the ECB’s plans may result in a “notable shift” away from U.S. dollar bond issuance towards euro borrowing, which they estimated could total $100 billion to $150 billion over the remainder of this year.
American companies were the biggest borrowers in euros last year, accounting for 22% of the €269 billion of investment-grade corporate debt sales, according to Dealogic, or more than German and Italian firms combined.
“We now have a critical mass of U.S. issuers coming to Europe. Those that haven’t already don’t want to be seen to be missing the opportunity,” Mr. Martin said.
Foreign companies can be included in the ECB’s corporate purchases provided their bonds meet several criteria, such as being eligible collateral for ECB lending operations. U.S. companies making the grade on that basis include industrial giant General Electric and Prologis, the world’s largest owner of industrial real estate.
Another box to tick: the bonds must be issued by a eurozone entity, though the parent can be headquartered elsewhere.
Whether those companies will issue through their European subsidiaries depends on whether they are willing to meet the necessary legal and operational hurdles, bankers say, such as drafting or updating issuance documentation.
“Bonds need to be rated and listed, which carries a cost,” said Marco Baldini, head of European corporate syndicate at Barclays.
Since the ECB announced its intentions to buy corporate bonds in March, corporate borrowing costs across the region have fallen.
The average yield on high-grade corporate euro debt is 1%, compared to 1.3% prior to the ECB announcement, according to Barclays. That compares with an average yield of 2.5% on similar U.S. corporate debt.
Some companies have already taken advantage. Last week, McDonald’s Corp. sold €2 billion of bonds. On a €750 million slug of that debt maturing in 2028, the restaurant owner paid an interest rate of 0.75%. That compares with a 3.7% coupon it pays on $1.75 billion of 10-year dollar bonds it sold in December as part of a $6 billion offering.
“McDonald’s is not a European company but it is enjoying the benefits” of the ECB’s program, said Mark Cernicky, managing director at Principal Global Investors. “We’ll definitely see some more U.S. companies coming to Europe to take advantage of the lower funding costs. Our concern is the byproduct of all this issuance: what are they going to do with all this cash?”
The ripple effects of the ECB’s buying could be felt farther afield.
So far, American companies’ euro borrowing spree has had little discernible impact on the U.S. corporate-bond market. Last year, U.S. corporations sold a record $611 billion of investment-grade dollar bonds, according to Dealogic, a 35% rise from 2014.
Still, the uptick in euro issuance continues. U.S. companies have already sold €24 billion in investment-grade euro debt this year, over five times the amount of issuance throughout the whole of 2011 at the height of the continent’s sovereign debt crisis.
Any resulting reduction in U.S. corporate-bond supply could provide a boost for that market, said Edward Farley, head of European corporate bonds at PGIM Fixed Income.
“A fair few U.S. companies may try and do their funding over here rather than in the U.S.,” said Mr. Farley. “If they’re reducing issuance, that’s a positive technical for U.S. corporate bonds.”