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Euro bond market proves irresistible for US corporates

* US borrowers in euro market hits unprecedented levels

By Philip Wright and Laura Benitez

LONDON, Feb 27 (IFR) – The euro-denominated bond market has been proving an almost irresistible port of call for high-grade US companies of late.

The number of such borrowers attracted to the sector has reached unprecedented levels, with low absolute coupons and tight spreads acting as a spur for US issuers to diversify funding avenues.

This is despite the cross-currency basis swap deteriorating steadily over the past couple of months, eroding some of the advantages on offer. At both the five-year and 10-year points of the curve, the levels have moved to around the negative 33bp area, having been in the mid-teens at the start of the year.

However, the list of market visitors has also included a number with euro commitments, so there are other factors at play.

“Despite the deteriorating swap rate, you can still save around 10bp-15bp by issuing in euros,” said a DCM syndicate banker. “But there’s not always a straightforward rationale for US companies to issue in euros. It can be for a variety of reasons. Some choose to leave it in euros for a while and leave it unswapped, so that direct comparison isn’t always important.”

The volume of debt being issued by US-domiciled investment-grade issuers has been on the march for a while now, data from Thomson Reuters show. From around 5bn in 2011, it more than doubled over each of the next couple of years – through 13.5bn in 2012 to 37bn in 2013 – and hit a high-water mark of some 62bn in 2014.

This year has already witnessed more than 23bn added to the tally. Just last week saw more than 15bn of such issuance, with the likes of Coca-Cola, AT&T and Mondelez offering multi-tranche transactions designed to appeal to a wide range of investors, and Priceline, Tyco Electronics and Moody’s adding single standalone maturities. Coca-Cola alone accounted for more than half the total – 8.5bn.

With a handful of mandates announced for imminent execution, the total for the first quarter of 2015 is already rivalling the 25bn issued in the fourth quarter of last year. By comparison, the first quarter of 2014 generated about 10bn on the way to the 62bn full-year total.

“A lot of non-European dollar funders are now thinking of euros as a funding currency,” said a banker at one of the leads on Coca-Cola’s transaction. “This is a function of spreads being tighter in Europe, yields being lower – meaning that the carry is lower – and expectations that the currency will weaken, creating a liability that will be lower in value in the future.”

CORPORATE SURGE

Something that has become noticeable is the proportion of corporate borrowers contributing to the score. February’s issuance comprised entirely such credits, a far cry from four or five years ago when there were just a paltry one or two that took the plunge.

True, January was FIG-heavy, with the likes of JP Morgan, Goldman Sachs, Citigroup and Morgan Stanley dominating proceedings. But a glance at the immediate pipeline shows names such as Kinder Morgan, Whirlpool, PPG and Flowserve, which when added to those that have already come to market makes for an impressive corporate roll-call.

And they are likely to receive a warm welcome from the European investor base, where impending QE purchases have caused spread-compression across asset classes, forcing them to look to widen the breadth of their holdings as they search out increasingly elusive returns. In addition, European accounts are generally more willing to embrace tenors that their US counterparts are not.

“The euro market has always provided greater flexibility than US dollars, especially for off-the-run maturities,” said Peter Charles, head of EMEA syndicate at Citigroup.

“As the bid for duration has increased, so have the realms of opportunities for issuers. Whereas doing 12-15 years would have been difficult previously because of limited investor capacity, the search for yield means that investors have been moving further along the curve.”

The fact that Coca-Cola stated that part of its 8.5bn proceeds would be used for the redemption of bonds maturing in March 2015 and repayment of 2017 and 2019 paper (all US dollar issues) spoke volumes about the attractive funding levels available.

But investor appetite notwithstanding, the window could be slowly shutting. Last week’s sudden influx of borrowers hinted at a rush to take advantage of conditions while they last as the low coupon rates and tight spreads are neutralised by the negative basis swap.

(Reporting By Laura Benitez and Philip Wright, editing by Matthew Davies)

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