Collapsing cost of euro funding lures U.S. firms over the ocean
This will be a record year for U.S. companies raising funds in euros, a financing option that should be widely used again next year if the euro weakens further against the dollar, as most analysts expect, and interest rate differentials remain wide.
U.S. non-financial firms have already raised a record 69.8 billion euros ($73.8 billion), up sharply on the previous record of 41.7 billion euros last year, according to Thomson Reuters data up to November 24.
That marks a rise to 25 percent of total issuance, also a record, from 15 percent. The number of deals stands at 68, well up from 50 last year and within sight of the record 73 set in 2000.
This surge has been prompted by the sharp fall in the euro and euro funding costs this year which has made it more attractive than ever for U.S. firms with a global presence to raise cash on the other side of the Atlantic.
The euro is on course for its biggest annual fall against the dollar since the year of its launch in 1999, while the gap between euro zone and U.S. bond yields is its widest in years.
For companies, the euro's "cross-currency basis swap" rate -the cost of swapping euros into dollars without the exchange rate risk - has been central to their renewed appetite for euro funding.
This week the three-month basis swap showed the highest premium for dollars since mid-2012. Earlier this month longer-dated bases that corporates use more, such as 5- or 7-year rates, hit their highest in almost four years.
This has made U.S. firms think twice about swapping the euros back. Instead many opt to keep them for other purposes such funding business operations in Europe or hedging their European exposure.
"It's an integral part of how U.S. companies view their funding now," said Rupert Lewis, head of European Syndicate at BNP Paribas in London. "Most of them are huge global companies."
Activity has slowed for the U.S. Thanksgiving holiday and as the Christmas holidays approach. But Mastercard (MA.N) raised 1.65 billion euros this week, and earlier this month UPS (UPS.N) raised 1 billion and Priceline (PCLN.O) 750 million.
The benchmark three-month euro/dollar cross-currency basis swap rate -- the premium an investor demands to swap euro-interest rate exposure into dollar-denominated exposure --
hit -56 basis points this week, a level not seen since the summer of 2012.
Much of this year's issuance came in the first quarter, when the euro plunged 15 percent and the 10-year German bond yield sank to just 0.05 percent.
While the euro and borrowing costs are now sliding again - two-year German yields are a record low -0.4 percent - the scale and speed of the move hasn't been as great. So there's been less of a sudden urge to take advantage of pricing anomalies.
And because the cost of swapping euros back into dollars is now nearly double what it was earlier in the year, U.S. firms issuing in euros may be more tempted to keep the cash in euros.
Brendon Moran, Global Co-Head, Corporate Origination Debt Capital Markets at Societe Generale in London, notes that while the nominal value of deals this year will smash records, the number of deals hasn't exploded.
"Whether we see a repeat in the surge in volumes we saw this year will be driven more by pricing arbitrage, which may or may not be there. I doubt we'll see a material change," he said.
($1 = 0.9457 euros)