By Anna Hirtenstein and Pat Minczeski
U.S. blue-chip companies raised an unprecedented sum in eurozone debt markets last year, reflecting the region's ultralow interest rates and global investors' thirst for securities issued by highly rated companies.
Coca-Cola Co. and International Business Machines Corp. were among the companies that raised a total of EUR101.7 billion ($113.5 billion) -- a record for nonfinancial company debt -- by selling corporate bonds denominated in euros in the past year, according to data from Dealogic. That was more than double the EUR42.2 billion raised the previous year from selling such debt, known as reverse Yankee bonds.
Capital markets in Europe have gained growing attention from corporate borrowers since 2012, as central banks in the region pushed a number of key benchmark rates to subzero levels. That has driven down borrowing costs, while leaving fixed-income investors looking for alternatives to the razor-thin returns offered by government bonds.
The average yield on euro-denominated nonfinancial corporate debt is currently 2.38 percentage points lower than on the U.S.-dollar equivalent, weighted across maturities, according to data from ICE BofAML indexes.
The low yields and strong investor appetite helped fuel a 38% increase in the sale of euro-denominated bonds, to EUR450 billion in 2019, by companies that aren't banks, insurers or other types of financial firms, according to Dealogic. U.S. businesses dominated the market, eclipsing Germany to make up nearly a quarter of the total, as some of the largest and most creditworthy American companies took advantage of the attractive yields to tap a fresh group of investors while paring their debt costs.
Investors' interest has escalated further since the European Central Bank resumed bond repurchases in November, snatching up even more of the debt on its approved list and leaving investors looking to other corners of the market for fresh opportunities.
"You even have some companies that have no European operations still financing in euros and hedging it back," said Thomas Ross, a fixed-income portfolio manager at Janus Henderson in London. "They're both benefiting from the ECB and the demand for yield from investors globally."
Even after factoring in the expense of converting the euros to dollars, there's a cost advantage of about 15 basis points on benchmark 10-year bonds for the issuers, according to Thibaut Cuilliere, head of real asset research and a credit strategist at French bank Natixis. He estimates that is likely to widen to 25 basis points on average by the end of the year.
In the first two weeks of 2020, U.S. companies including food manufacturer General Mills Inc. raised EUR1.14 billion from reverse Yankees, according to data from Dealogic. General Mills, whose brands include Lucky Charms and Pillsbury, tapped the market for EUR600 million with a 0.450%-coupon note maturing in 2026.
While American companies in the past have used reverse Yankee bonds to fund European operations or the acquisition of companies in the region, more and more businesses on both sides of the Atlantic are now simply taking the opportunity to refinance their existing debt at cheaper levels, and for longer periods. The average maturity for reverse Yankee bonds in 2019 was 8.84 years, according to Dealogic.
Redemptions -- or early repayments on debt -- will climb 21% to EUR260 billion in the euro-denominated corporate bond market this year, according to Natixis.
U.S. companies with investment-grade ratings, rather than high-yield issuers, have benefited the most from the imbalance created by the ECB's bond-buying program, which focuses on lower-risk securities. Companies with lower ratings also tend to be smaller and less known internationally, hindering their ability to get favorable treatment from European investors.
"If you're a high-yield name in the U.S., you'd have to spend a lot of time trying to educate the investor base in Europe if you come over here, " said Roger Appleyard, head of credit sector strategy at RBC Capital Markets. "Even in those circumstances, you might not get cheaper funding than in the States."
The European corporate-bond market is likely to see a slowdown this year following a pause in mergers and acquisitions during 2019, and as big cash piles deter local businesses from fundraising, according to Mr. Cuilliere. Still, reverse Yankee bonds will continue to dominate the market, he forecast.
"Given the high levels of liquidity provided by the central bank, it means that the spread will stay low for a longer period of time," Janus Henderson's Mr. Ross said.
Write to Anna Hirtenstein at email@example.com