Allure of Cheap Borrowing Costs in Europe

In 2015, U.S. companies are forecast to cross the Atlantic to raise funds in euros at the fastest pace in at least eight years, as borrowing costs in Europe fall below dollar rates by the most in a decade.

Apple Inc., Verizon Communications Inc., and Albemarle Corp. led 68 billion euros (US$83 billion) of bond issuance by American borrowers this year, the busiest since 2007 and 45 percent higher than 2013, according to data compiled by Bloomberg. The number will be surpassed next year as depressed funding costs endure, according to Barnaby Martin, a credit strategist at Bank of America Merrill Lynch, and Jens Vanbrabant, the lead money manager at London-based ECM Asset Management Ltd.

While Federal Reserve Chair Janet Yellen has set the stage for higher U.S. borrowing costs next year, European interest rates are predicted by economists to remain at record lows. As inflation in the region is poised to turn negative, momentum is building for the European Central Bank (ECB) to start a quantitative easing program of government bond purchases to boost growth.

“We would expect the yield gap to widen in the first half of the year on expectations that the ECB will continue to pump cash into the system through the purchase of bonds and that the Fed will raise interest rates,” said Jonathan Pitkanen, the London-based head of investment-grade credit research at Threadneedle Asset Management Ltd., which oversees 92.6 billion pounds ($144 billion).

The average yield investors demand to hold investment-grade corporate bonds in euros is 2.11 percentage points less than comparable dollar-denominated notes, the biggest difference since data started to be compiled in December 2004 and wider than the 1.25 percentage-point gap at the start of the year, Bank of America Merrill Lynch data show.

Acquisition Financing

Albemarle is capitalizing on the difference in cost. The Baton Rouge, Louisiana-based chemical maker sold euro bonds for the first time on Dec. 1 and plans to return for more. For three days in the run up to the sale, Chief Financial Officer Scott Tozier and Treasurer Lorin Crenshaw traveled from Frankfurt to London, Paris, and Amsterdam, meeting investors to drum up interest in their 700 million-euro offering.

“There have been a number of companies that have stepped up their European borrowing this year, and that opened the doors for us,” Tozier said. “I fully expect we will go in again.”

The company's notes had a coupon of 1.875 percent, almost half of what they would have had to pay in the U.S., Tozier said. It used proceeds to fund its purchase of lithium producer Rockwood Holdings Inc. and to refinance debt.

In November, Belden Inc., a St. Louis-based maker of networking equipment, sold 200 million euros of 5.5 percent bonds maturing 2023, its first offering in the currency this year. “We saw it was a good time for us to be in the market,” said Matt Tractenberg, the company's vice president of investor relations. “It's a natural hedge for us in Europe for our European profits.”

Albemarle and Belden followed Cupertino, California-based Apple, which sold 1.4 billion euros of eight-year notes and an equal amount of 12-year bonds on Nov. 4. Verizon, the largest U.S. wireless carrier, sold 3 billion euros of notes maturing in February 2022 and 2026 as part of a three-part offering on Feb. 5.

Apple's 1.4 billion euros of 1.625 percent securities, issued at 99.5 euro cents traded at 102 cents on the euro today. New York-based Verizon's 1.75 billion euros of 2.375 percent notes were at 109 cents, after being issued at 99.5 cents.

“Once you have debut issuers doing something, you tend to find it creates a rush of other companies looking to do the same,” said Bank of America Merrill Lynch's Martin.

WP Carey Inc., a New York-based real estate investment trust, this month completed a road show in Europe for euro bonds, its first in the currency, according to people familiar with the matter who asked not to be identified because they aren't allowed to speak on the subject.

The average yield on investment-grade notes in euros has fallen to a record low of 1.12 percent after starting the year at 2.08 percent, Bank of America data show. The extra yield investors demand to hold the debt instead of government bonds rose to 0.97 percentage point, after reaching a seven-year low of 0.91 percentage points on Nov. 11.

U.S. company bonds yield 3.23 percent, while the premium over Treasuries is 1.43 percentage points.

2015 Sales

UBS Group AG forecasts there will be 200 billion euros of bond issuance by investment grade, non-financial companies in 2015, compared with 191.5 billion euros issued for the year to date in 2014, it said in a Nov. 13 report.

Global companies will continue to sell euro bonds provided the pricing advantage remains, said Frazer Ross, a managing director of corporate debt syndicate at Deutsche Bank AG.

“We have a volatile market right now, with the issue of Greece coming back into the equation,” Ross said. “If the euro basis swap worsens and the comparative pricing between the two markets worsens, will big American companies do euros? The answer is yes, but in much smaller volume.”

Greece faces snap elections early in the New Year after Prime Minister Antonis Samaras failed in his third and final attempt to persuade parliament to back his candidate for head of state.

The European Central Bank will start large-scale buying of government bonds next year, more than 90 percent of respondents in Bloomberg's monthly survey predicted. The U.S. may raise interest rates for the first time since 2006 in the third quarter, according to the median estimate of economists surveyed by Bloomberg News.

“Bankers see this opportunity and advise their clients to take advantage of it, so the trend should continue into next year,” ECM Asset Management's Vanbrabant said. “Money goes where there's opportunity.”

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