US companies are rushing to borrow in European bond markets. They’re taking advantage of low interest rates on euro-denominated issues after the European Central Bank’s decision to start buying investment-grade corporate bonds in June—part of its economic stimulus program. Last year already set a record for corporate borrowing in Europe’s bond markets, where rates are significantly lower than in the US.
Credit markets in Europe soared in price March 10, pushing interest rates down sharply following the ECB’s surprise announcement that it would begin buying nonbank corporate debt in primary and secondary markets as part of its $92 billion monthly asset purchases. Previously, such purchases were mainly in government bonds.
Belgian brewer Anheuser-Busch InBev promptly entered the market with a record €13.25 billion ($15 billion) corporate bond issue. The bond beat the previous record for a euro-denominated issue of €9.9 billion by Roche, the Swiss pharmaceutical company, in 2009. US companies with billions of dollars of mergers and acquisitions to refinance will continue to place euro-denominated bonds in Europe in large quantities, analysts say. Since many European government bonds have negative yields, bonds from highly rated US companies offer an attractive alternative to investors.
The ECB’s corporate bond‒buying could produce a shift away from dollar-denominated issuance and toward euro borrowing, according to credit strategists at Wells Fargo. They estimated in a recent research note that such borrowing could reach $100 billion to $150 billion over the remainder of this year.
McDonald’s sold $2.3 billion of euro-denominated bonds in a three-part offering in late April, its biggest euro issue ever. On the portion maturing in 2028, it paid an interest rate of 0.75%, well below the 3.7% coupon it paid on 10-year dollar-denominated bonds it sold last December.
Investment-grade, euro-denominated bonds issued from a European subsidiary of a US parent can qualify for ECB buying. “This should make the European corporate market even more attractive to US issuers that can now potentially benefit from ECB quantitative easing directly,” Yuriy Shchuchinov, credit strategist at Merrill Lynch, wrote in a BofA Merrill Lynch Global Research report.
“This is on top of the benefits from broadening out their funding sources,” Shchuchinov says. “Hence, we continue to expect that increasing volumes of reverse Yankee issuance will subtract from dollar-denominated high-grade supply and help support credit spreads in our market.”
A Yankee bond is a dollar-denominated bond publicly issued in the US by a foreign corporation. Euro-denominated bonds issued in Europe by US corporations are referred to as “reverse Yankee” bonds.
As of early May, US corporations had already sold €24 billion in investment-grade euro debt this year, according to Dealogic. On May 11, Johnson & Johnson, the world’s largest maker of healthcare products, sold $4.6 billion of euro-denominated bonds, its first such sale such 2007.
Even if companies don’t need euros, they can borrow them cheaply in Europe and convert them back into dollars.