Reverse Yankee Bonds Set Record Pace

Falling euro yields and the ECB's deep pockets offer U.S. issuers an escape hatch.

You’re the treasurer of a U.S. company and you have $1 billion of junk bonds to sell. But buyers are getting a bit sniffy. What do you do?

Go to Europe, of course. There you can fund at almost the same rate as the U.S. government. Demand will be such that you may even have to turn buyers away.

Falling swap costs, low yields and the deep pockets of Mario Draghi’s ECB have come together to create a banner year for reverse Yankees from American companies borrowing in the single European currency.

September sales will bring year-to-date issuance of junk bonds in euros and pounds by U.S. firms to a record 10 billion euros ($12 billion), according to data compiled by Bloomberg, eclipsing the previous highest annual total of 9.7 billion euros-equivalent in 2016, the data show.

It’s not just companies with fragile balance sheets rushing to Europe. Their better-capitalized peers are setting a blistering pace. Wells Fargo Securities estimates 110 billion euros of investment-grade issuance for reverse Yankees this year, 20% over 2016’s record.

“U.S. issuers will look to take advantage of strong technicals in the euro credit market, led by a normalizing euro-dollar basis swap, and a very flat euro credit curve,” said Nathaniel Rosenbaum, a New York-based credit strategist at Wells Fargo.

So far this year, U.S. companies have borrowed 57 billion euros in Europe, on both high-yield and high-grade markets, according to Bloomberg data. That compares with 42 billion euros in the corresponding period in 2016.

The premium to procure dollars with euros in the foreign-exchange swap market, the basis swap, has tumbled, making it more cost-effective for U.S. companies to swap proceeds back to their home currency.

At the same time, the European Central Bank has sucked up 1,000 corporate bonds worth 100 billion euros since it started buying credit in June 2016, keeping a lid on borrowing costs.

The latest speculative-grade American company to come to Europe, data center operator Equinix Inc., raised 1 billion euros after initially seeking 250 million euros less. The securities were rated B1 by Moody’s Investors Service, four levels below investment grade.

Contrast that with the U.S., where the price of Tesla Inc.’s new bonds fell within a week of their Aug. 11 pricing. High-yield risk premiums have jumped 20 basis points in the past month and they’re in excess of 100 basis points more than in Europe.

Other recent issuers of reverse Yankee bonds include Kimberly-Clark and GM Financial Co. in August and Diversey, Thermo Fisher Scientific and Nestle in June.

 Reverse Yankee Bonds chart

 

Bloomberg News

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