Reverse Yankees U.S. Companies Love the Euro

American corporations are increasingly issuing euro bonds, much to the delight of investors. With attractive yields, bankers anticipate an ongoing flood of issues.
An IBM robot at a trade fair in Spain this February. The company recently issued euro bonds for €2.25 billion.

 

Think big. It's a common motto among American companies, especially in the bond market. When they issue bonds, they do it in a big way. And the Americans are not just tapping the domestic market on a grand scale. They are also tapping the market for euro bonds.

Technology group Honeywell raised $3 billion (€2.67 billion) in February; Warren Buffet's investment company Berkshire Hathaway borrowed €2.75 billion ($3.08 billion) in March; and IBM issued bonds for €2.25 billion; United Technologies did the same for €2.2 billion.

Institutional investors, such as insurance companies and pension fund managers, which are required to invest in bonds, like the euro bonds issued by U.S. companies. "The issuers are often sound and reputable companies, whose bonds also frequently offer higher yields than those of companies from the euro zone," said Anthony Bryson, capital markets expert with BNP Paribas in Frankfurt.

 

The Americans are Coming-01 bonds issues US investors U.S.

 

There are many examples. For instance, the new bond tranches with maturities of seven to eight years issued by Honeywell, IBM, Berkshire Hathaway and United Technologies are yielding more than 1 percent. The bonds are rated very good to good by rating agencies. German automaker Daimler's new seven-year bond, also with a high rating, is yielding only 0.8 percent, while Deutsche Telekom's bond, with a medium rating, is yielding 0.7 percent.

"U.S. companies are more willing to pay somewhat higher risk premiums. What matters to them are the low coupons they can currently achieve in the euro market," said Paula Weisshuber with the capital markets team at BofA Merrill Lynch in Frankfurt.

The Americans' love of the euro is understandable, since they can borrow money far more cheaply in the euro zone than in their own market. In the United States, the average yield for eight-year U.S. dollar bonds of companies with very good to good credit ratings is currently about 3 percent.

The prices of euro corporate bonds have risen and their yields have declined, since the European Central Bank announced two weeks ago that it intends to buy euro zone corporate bonds with high ratings beginning in late June. In this sense, U.S. companies also benefit from the ECB's policy, even though European central bankers will not be purchasing U.S. corporate bonds.

Besides, said Matthias Minor, head of corporate debt capital markets at the Royal Bank of Scotland in Frankfurt, "even if U.S. companies don’t need any euros, it is currently very advantageous for them to exchange the euros back into dollars in the market."

For bankers, it is clear that U.S. companies will continue to vigorously tap the euro market. There is no end in sight to the placement of euro bonds of U.S. companies, known as Reverse Yankees, said Mr. Bryson of BNP Paribas. One reason he cited is that U.S. companies still have about €200 billion in mergers and acquisitions to refinance. Mr. Bryson is convinced that "there is still plenty more coming down the pipeline, including in euros."

According to the Dealogic information service, last year U.S. companies held a 22-percent share of placements of new euro bonds by companies with good crediting ratings. This year, the figure so far is 23 percent. In contrast companies from the euro zone have placed fewer new bonds in recent years, because they are more likely to be deleveraging than borrowing.

U.S. companies' appetite for euros is good for investors, because it expands the selection of available bonds in which to invest. Not only that, said Ms. Weisshuber of BofA Merrill Lynch, noting: "Investors don’t have to compete with the ECB as a buyer of U.S. corporate bonds."

 

Andrea Cünnen works at Handelsblatt's finance desk in Frankfurt, reporting on the bond markets. To contact the author: [email protected]