U.S. Corporate Bonds Popular in Europe

Cargill and P&G are among the companies finding good demand for their debt in Europe.

U.S. companies from Cargill Inc. to Procter & Gamble Co. are selling bonds in Europe at the fastest pace since 2008 as they tap investor appetite for securities from borrowers outside the crisis-damaged euro region.

Euro-denominated offerings from American companies including Cincinnati-based P&G’s first deal in the currency since 2007 pushed sales to $5.7 billion last month, the busiest August in four years, data compiled by Bloomberg show. The surge brings this year’s total to $14.5 billion, the most for the period since 2010 and matching the amount for all of 2011.

Debt of U.S. companies offers shelter from Europe’s crisis while at the same time paying a return as the continent’s safest government bond yields turn negative. The securities are becoming even more attractive amid speculation policymakers at the European Central Bank will seek to water down measures aimed at easing the turmoil when they meet this week.

“There’s high demand for non-Eurozone issuers,” said Christopher Bullock, a money manager in London at Henderson Global Investors Ltd., which holds 18 billion euros ($22 billion) of fixed-income assets. “Large-cap U.S. corporates that have issued bonds in Europe are generally strong companies benefiting from diversified business portfolios.”

European corporate bonds outperformed last month by the most since March, returning 1.08 percent including reinvested interest, compared with 0.4 percent for U.S. securities, Bank of America Merrill Lynch data show.

Investment-grade European company bonds yield a record-low 2.58 percent, down from 4.4 percent at the start of the year, the firm’s EMU Corporate Index shows. That’s less than the 2.98 percent yield on its U.S. Corporate Master Index. At the same time, the cost for U.S. companies to convert euro-denominated payment streams into dollar-based funding via the cross currency swaps market is the least since June 2011.

Elsewhere in credit markets, the cost of protecting corporate debt from default in the U.S. fell, with the Markit CDX North America Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, decreasing 0.8 basis point to a mid-price of 100.3 basis points as of 11:21 a.m. in New York, according to prices compiled by Bloomberg.

The measure typically falls as investor confidence improves and rises as it deteriorates. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

 

Swap Spreads

The U.S. two-year interest-rate swap spread, a measure of debt market stress, increased 0.25 basis point to 16.5 basis points as of 11:20 a.m. in New York. The gauge widens when investors seek the perceived safety of government securities and narrows when they favor assets such as company debentures.

Bonds of Rio de Janeiro-based Vale SA are the most actively traded dollar-denominated corporate securities by dealers today, with 176 trades of $1 million or more as of 11:23 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The world’s biggest iron-ore producer sold $1.5 billion of 30-year, 5.625 bonds yesterday.

Cargill, the biggest U.S. agricultural company, raised 500 million euros on Aug. 28 by selling 1.875 percent bonds due 2019 in its first note sale in the European currency since 2008, Bloomberg data show. The seven-year senior, unsecured bonds yield 56 basis points more than the benchmark swap rate, one basis point below their issue price, the data show.

“Cargill has a significant business presence and assets in Europe and investors there are interested in portfolio diversification,” Laura Brems, a spokeswoman for Minneapolis-based Cargill at it offices in Cobham, England, said Aug. 28.

European investors are counting on policy makers to agree on steps to help resolve the crisis that has roiled the region’s debt markets for the past three years. Greece, Portugal, Ireland, Spain and Cyprus have all sought aid.

ECB President Mario Draghi told lawmakers Sept. 3 that the bank’s primary mandate compels it intervene in bond markets to wrest back control of interest rates and ensure the euro’s survival.

There is growing investor concern that the ECB won’t be able to decide on a comprehensive survival plan at tomorrow’s governing council meeting. Germany’s Bundesbank opposes the ECB purchasing government bonds, saying it is too close to state financing for its comfort.

 

P&G Bonds

There is “no silver bullet against the crisis,” Alberto Gallo, a debt analyst at Royal Bank of Scotland Group Plc in London, wrote in a Sept. 3 research note.

U.S. issuers are helping to fill a void left by European borrowers, which sold 24.6 billion euros of debt in August, marking the slowest month in a year and making the year-to-date total of 389 billion euros the least for the period since 2007.

Offerings globally totaled $251 billion, a record for August, according to data compiled by Bloomberg.

P&G, the world’s largest consumer products company, sold 1 billion euros of 2 percent, 10-year notes on Aug. 9 at a yield of 25 basis points more than the swap rate after initially marketing the securities at a spread of 35.

The sale was the Cincinnati-based company’s first in the currency since raising 1.1 billion euros from 10-year bonds in October 2007, Bloomberg data show.

Wells Fargo & Co., the biggest U.S. mortgage lender, sold 1.5 billion euros of 2.625 percent 10-year bonds on Aug. 9, converting the proceeds back to dollars, said Mary Eshet, spokeswoman for Wells Fargo in San Francisco.

“Issuing in euros provided a benefit to Wells Fargo with respect to diversification in our investor base,” she said.

The three-month cross-currency basis swap was 27.3 basis points below the euro interbank offered rate, or euribor, yesterday. That spread has shrunk from as much as minus 114 basis points at the start of the year. A negative number indicates investors are willing to receive reduced interest payments on the euros they lend in order to obtain the needed financing in dollars.

JPMorgan, the largest U.S. lender by assets, raised 1.5 billion euros from its first bond sale in the European currency in more than a year on Aug. 17. Before that, the last time the New York-based lender did a deal in euros was when it raised 1 billion euros in June 2011, according to data compiled by Bloomberg.

 

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